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Storage, transport and the law of one price: evidence from nineteenth century U.S. corn markets

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  • Coleman, Andrew

Abstract

This paper argues that localised 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 centre regularly fall to zero. 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.

Suggested Citation

  • Coleman, Andrew, 2005. "Storage, transport and the law of one price: evidence from nineteenth century U.S. corn markets," 46th Annual Transportation Research Forum, Washington, D.C., March 6-8, 2005 208149, Transportation Research Forum.
    • Handle: RePEc:ags:ndtr05:208149
    DOI: 10.22004/ag.econ.208149
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    File URL: https://ageconsearch.umn.edu/record/208149/files/2005_CornMarkets_paper.pdf
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    References listed on IDEAS

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    1. John Burr Williams, 1936. "Speculation and the Carryover," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 50(3), pages 436-455.
    2. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, November.
    3. Working, Holbrook & Hobe, Adelaide M., 1929. "The Post-Harvest Depression of Wheat Prices," Wheat Studies, Stanford University, Food Research Institute, vol. 6(01), pages 1-40, November.
    4. Chambers, Marcus J & Bailey, Roy E, 1996. "A Theory of Commodity Price Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 924-957, October.
    5. W. J. Baumol & H. D. Vinod, 1970. "An Inventory Theoretic Model of Freight Transport Demand," Management Science, INFORMS, vol. 16(7), pages 413-421, March.
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    Cited by:

    1. Andrabi, Tahir & Kuehlwein, Michael, 2010. "Railways and Price Convergence in British India," The Journal of Economic History, Cambridge University Press, vol. 70(2), pages 351-377, June.

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