'Mind the Gap!': Transport Costs and Price Convergence in the 19th Century Atlantic Economy.

This paper challenges the widely held view that sharply falling real transport costs closed the transatlantic gap in grain prices in the second half of the 19th century. Several new results emerge from an analysis of a new data set of weekly wheat prices and freight costs from New York to UK markets. Firstly, there was a decline in the transatlantic price gap but it was not sharp and the gap remained substantial. Secondly, the fall in the transatlantic price differential had more to do with improved market and marketing efficiency than with falling transport costs. Thirdly, spurious price convergence (or divergence) can appear if quality differences associated with allegedly homogeneous commodities like wheat are not controlled for.market integration; spatial price gaps

The Cost of Ignorance: Reputational Mark-up in the Market for Tuscan Red Wines

This paper argues that imperfectly informed consumers use simple signals to identify the characteristics of wine. The geographical denomination and vintage of a wine as well as the characteristics of a particular wine will be considered here. However, the specific characteristics of a wine are difficult to ascertain ex ante given the enormous product variety. The reputation of a denomination will thus be an important guide for consumers when assessing individual wines. Denomination reputation is a function of average quality as revealed by the past performance of producers. The impact of past performance increases over time, since producers consider improved average quality to be an important factor in enhancing the price, but this necessitates monitoring of members in the denomination. The market and pricing of Tuscan red wines provide a natural experiment because there are a number of denominations of different age, each of which is typically undergoing a process of gradual increase in quality standards over time. Furthermore, Tuscan red wines are easily comparable because of great similarities in climate and choice of grape varieties, soil and exposure to sun etc. We show that new denominations have a lower average quality score and that price differentials between denominations are linked to differences in average quality, although consumers tend to exaggerate the quality gap between prestige denominations and new denominations. Thus, a producer in an old denomination benefits from a substantial mark-up relative to an equally good producer from a new denomination. Since ambitious producers in new denominations suffer from price ‘discrimination’ it can be expected that they will produce vineyard branded but denomination neutral wines, provided they can overcome the large fixed costs associated with that strategy. We show that denomination neutral wines do indeed have a stronger price-quality relationship than denomination specific wines.wine; Tuscany; price-quality relationship

The Nature and Costs of Dis-Equilibrium Trade: The Case of Transatlantic Grain Exports in the 19th Century

The essential issue addressed in this paper is whether inefficient spatial arbitrage has significant welfare effects. The paper looks at the gains from improved market efficiency in transatlantic grain trade in the period 1855-1895. It shows that there is a law of one price equilibrium but that markets display spells of demand- or supply- constrained trade. Over time adjustments back to equilibrium as measured by the half-life of a shock become faster, and adjustment parameters are much larger than routinely reported in the PPP-literature. There are also significant gains from improved market efficiency but most of that improvement takes place in one step after the information ‘regime’ shifts from pre-telegraphic communication to a regime with swift transmission of information in an era with a sophisticated commercial press and telegraphic communication. Improved market efficiency probably stimulated trade more than falling transport costs.market integration; error correction; law of one price

Market Integration and Convergence in the World Wheat Market, 1800-2000

This paper argues that the conventional view which sees international transport costs reductions as the major force in price convergence cannot be upheld when the period under scrutiny is extended to the last two centuries. Domestic transport costs fell for land-locked regions while real international transport costs fluctuated strongly without exhibiting a significant trend. Changes in trade policies were the single most important factor explaining convergence and divergence of prices in the long run.market integration; price convergence; protectionism

The Gains from Improved Market Efficiency: Trade Before and After the Transatlantic Telegraph

This paper looks at the gains from improved market efficiency in long-distance grain trade in the second half of the 19th century when violations of the law of one price were reduced due to improved information transmission. Two markets, a major export centre, Chicago, and a major importer, Liverpool, are analyzed. We show that there was a law of one price equilibrium throughout the period but that markets displayed spells of demand- or supply-constrained trade when the law of one price was violated. Over time adjustments back to equilibrium, as measured by the half-life of a shock, become faster, violations of the law of one price become smaller and hence less persistent. There were also significant gains from improved market efficiency but that improvement took place after the information ‘regime’ shifted from pre-telegraphic communication to a regime with swift transmission of information in an era which developed a sophisticated commercial press and telegraphic communication. Improved market efficiency probably stimulated trade more than falling transport costs.market integration; error correction; law of one price

Feeding the British: Convergence and Market Efficiency in 19th Century Grain Trade

This paper traces the evolution of the international market for wheat from an emerging market structure after the repeal of the Corn Laws to a mature market characterized by efficient arbitrage after the introduction of the transatlantic telegraph and the growth of trade. Efficiency is documented using traditional price gap accounting as well as error correction modelling. Markets which traded directly with each other as well as markets which did not trade with each other were integrated. The traditional bi-lateral focus in market integration studies has been extended to a multi-variate approach which generates new insights as to the pattern of diffusion of price shocks in the international economy. Shocks in the major importing nation, Britain, dominated in the emerging market phase while shocks in the major exporting economy, United States, dominated international prices movements at the end of the 19th century.