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The gains from improved market efficiency: trade before and after the transatlantic telegraph

Published online by Cambridge University Press:  30 July 2010

METTE EJRNÆS  and
KARL GUNNAR PERSSON
METTE EJRNÆS
Affiliation:
Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark, Mette.Ejrnes@econ.ku.dk
KARL GUNNAR PERSSON
Affiliation:
Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark, Mette.Ejrnes@econ.ku.dk
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Abstract

This article looks at the gains from improved market efficiency in long-distance grain trade in the second half of the nineteenth 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 analysed. We show that the law of one price equilibrium was an ‘attractor equilibrium’. The implication is that prices converged to that equilibrium in a tâtonnement process. Because of asymmetrically timed information between markets separated by long distances there were periods of excess demand as well as excess supply, which triggered off the tâtonnement process. Over time, adjustments to equilibrium, as measured by the half-life of a shock, became faster and violations of the law of one price become smaller. There were significant gains from improved market efficiency, which took place after the information ‘regime’ shifted from pre-telegraphic communication to a regime with swift transmission of information in an era that saw the development of a sophisticated commercial press and telegraphic communication. This article is the first attempt to actually measure the gains from improved market efficiency and it demonstrates that improved market efficiency probably stimulated trade more than falling transatlantic transport costs. Deadweight losses decline significantly as markets became more efficient. The conventional view that Harberger triangles are almost always insignificant is challenged.

Type
Research Article
Information
European Review of Economic History , Volume 14 , Issue 3 , December 2010 , pp. 361 - 381
Copyright
Copyright © European Historical Economics Society 2010

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