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Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets

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  • Andrew Coleman

    (Motu Economics)

Abstract

This paper argues that localized price spikes should be a regular feature of competitive commodity markets. It develops a rational expectations model of physical arbitrage in which trade takes time, and shows that inventory management plays a crucial role in the way regional prices are determined. In equilibrium, arbitrageurs choose export quantities to ensure inventories in the importing center regularly fall to 0. They earn enough profits from high prices on these occasions to offset small losses at other times. An analysis of detailed data from Chicago and New York corn markets provides empirical support for the model. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Andrew Coleman, 2009. "Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 332-350, May.
    • Handle: RePEc:tpr:restat:v:91:y:2009:i:2:p:332-350
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    Cited by:

    1. Giovanni Federico & Paul Sharp, 2013. "The cost of railroad regulation: the disintegration of American agricultural markets in the interwar period," Economic History Review, Economic History Society, vol. 66(4), pages 1017-1038, November.
    2. Nicolas Legrand, 2019. "The Empirical Merit Of Structural Explanations Of Commodity Price Volatility: Review And Perspectives," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 639-664, April.
    3. Christophe Gouel & Sébastien Jean, 2015. "Optimal Food Price Stabilization in a Small Open Developing Country," The World Bank Economic Review, World Bank, vol. 29(1), pages 72-101.
    4. Gábor Békés & Lionel Fontagné & Balázs Muraközy & Vincent Vicard, 2017. "Shipment frequency of exporters and demand uncertainty," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 779-807, November.
    5. Sergio H. Lence & GianCarlo Moschini & Fabio Gaetano Santeramo, 2018. "Threshold cointegration and spatial price transmission when expectations matter," Agricultural Economics, International Association of Agricultural Economists, vol. 49(1), pages 25-39, January.
    6. Christophe Gouel, 2014. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Chapters, in: The Economics of Food Price Volatility, pages 261-306, National Bureau of Economic Research, Inc.
    7. Donald F. Larson & Julian Lampietti & Christophe Gouel & Carlo Cafiero & John Roberts, 2014. "Food Security and Storage in the Middle East and North Africa," The World Bank Economic Review, World Bank, vol. 28(1), pages 48-73.
    8. Santeramo, Fabio, 2021. "Price dynamics, LOP and quantile regressions," MPRA Paper 107454, University Library of Munich, Germany.
    9. Christophe Gouel & Madhur Gautam & Will J. Martin, 2016. "Managing food price volatility in a large open country: the case of wheat in India," Oxford Economic Papers, Oxford University Press, vol. 68(3), pages 811-835.
    10. Hood, Harrison B. & Dorfman, Jeffrey H., 2014. "Testing Timber Market Linkages with a STAR Model with Housing Start-Controlled Transitions," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169055, Agricultural and Applied Economics Association.
    11. Steinwender, Claudia, 2013. "Information Frictions and the Law of One Price: “When the States and the Kingdom became United”," CEPREMAP Working Papers (Docweb) 1314, CEPREMAP.
    12. Sayat R. Baronyan & İ. İlkay Boduroğlu & Emrah Şener, 2010. "Investigation Of Stochastic Pairs Trading Strategies Under Different Volatility Regimes," Manchester School, University of Manchester, vol. 78(s1), pages 114-134, September.
    13. Eric Overby & Jonathan Clarke, 2012. "A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading," Management Science, INFORMS, vol. 58(2), pages 394-412, February.
    14. Bennett, Max & Yuan, Yue, 2016. "On the Price Spread of Benchmark Crude Oils: A Spatial Price Equilibrium Model," MPRA Paper 76024, University Library of Munich, Germany.
    15. Hemang Subramanian & Eric Overby, 2017. "Electronic Commerce, Spatial Arbitrage, and Market Efficiency," Information Systems Research, INFORMS, vol. 28(1), pages 97-116, March.
    16. Wolfgang Keller & Carol H. Shiue, 2020. "Market integration and institutional change," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(2), pages 251-285, May.
    17. Fabio Gaetano Santeramo & Emilia Lamonaca & Francesco Contò & Gianluca Nardone & Antonio Stasi, 2018. "Drivers of grain price volatility: a cursory critical review," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 64(8), pages 347-356.
    18. Laura Panza, 2024. "From a common empire to colonial rule: Commodity market disintegration in the Near East," Economic History Review, Economic History Society, vol. 77(2), pages 584-611, May.
    19. Golden, Dana, 2020. "Basis as a Game: Game Theory and Determination of Cash Grain Prices," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304194, Agricultural and Applied Economics Association.
    20. Sharp, Paul & Weisdorf, Jacob, 2013. "Globalization revisited: Market integration and the wheat trade between North America and Britain from the eighteenth century," Explorations in Economic History, Elsevier, vol. 50(1), pages 88-98.

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