Credit Merchandising in the Postbellum American South: Information and Barriers to Entry

Abstract

Roger Ransom and Richard Sutch's research on the social and institutional changes in the postbellum American South, summarized in their One Kind of Freedom, raised many controversies. One of them concerns the degree of competition among the advancing merchants of the rural South. Ransom and Sutch's assertion that such merchants held a 'territorial monopoly'' is usually criticized as being at odds with the high level of postbellum entry in the rural merchandising sector and the absence of significant costs to entry. The question is still open, as shown by a recent special issue of Explorations in Economic History. This paper offers a contribution to this controversy by showing that high level of entry in the market and excessively high prices need not to be in conflict. In particular, using the theory of incomplete information games to study the competition between an advancing merchant and a potential entrant, the practice of over-pricing is shown to be an equilibrium behavior if interpreted as a way of signaling information about the market riskiness.credit merchandising, asymmetric information