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

Author

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  • Mette Ejrnæs

    (Department of Economics, University of Copenhagen)

  • Karl Gunnar Persson

    (Department of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Mette Ejrnæs & Karl Gunnar Persson, 2006. "The Gains from Improved Market Efficiency: Trade Before and After the Transatlantic Telegraph," Discussion Papers 06-19, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0619
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    References listed on IDEAS

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    2. Zouheir El-Sahli, 2020. "Submarine cables, the internet backbone and the trade in services," Discussion Papers 2020-05, University of Nottingham, GEP.
    3. Markus Lampe & Paul Sharp, 2014. "Greasing the wheels of rural transformation? Margarine and the competition for the British butter market," Economic History Review, Economic History Society, vol. 67(3), pages 769-792, August.
    4. Markus Lampe & Paul Sharp, 2015. "How the Danes discovered Britain: the international integration of the Danish dairy industry before 1880," European Review of Economic History, European Historical Economics Society, vol. 19(4), pages 432-453.
    5. Wache, Benjamin, 2021. "Information Frictions, Global Capital Markets, and the Telegraph," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242444, Verein für Socialpolitik / German Economic Association.
    6. Cannon, Edmund & Brunt, Liam, 2013. "Integration in the English wheat market 1770-1820," CEPR Discussion Papers 9504, C.E.P.R. Discussion Papers.
    7. Ganneval, S., 2016. "Spatial price transmission on agricultural commodity markets under different volatility regimes," Economic Modelling, Elsevier, vol. 52(PA), pages 173-185.
    8. Tahir Andrabi & Sheetal Bharat & Michael Kuehlwein, 2021. "Information And Price Convergence:Telegraphs In British India," BASE University Working Papers 04/2021, BASE University, Bengaluru, India.
    9. 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.
    10. Martin T. Bohl & Alexander Pütz & Pierre L. Siklos & Christoph Sulewski, 2021. "Information transmission under increasing political tensions—Evidence from the Berlin Produce Exchange 1887–1896," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(2), pages 226-244, February.
    11. Pierre Cotterlaz, 2021. "Three essays on spatial frictions [Trois essais sur les frictions spatiales]," Sciences Po Economics Publications (main) tel-03436173, HAL.
    12. Pierre Cotterlaz, 2021. "Three essays on spatial frictions [Trois essais sur les frictions spatiales]," SciencePo Working papers tel-03436173, HAL.
    13. Claudia Steinwender, 2018. "Real Effects of Information Frictions: When the States and the Kingdom Became United," American Economic Review, American Economic Association, vol. 108(3), pages 657-696, March.
    14. Alexander Pütz & Pierre L. Siklos & Christoph Sulewski, 2019. "“Who pays the piper calls the tune” – Networks and transaction costs in commodity markets," CQE Working Papers 8819, Center for Quantitative Economics (CQE), University of Muenster.
    15. Martin Uebele & Daniel Gallardo-Albarr�n, 2015. "Paving the way to modernity: Prussian roads and grain market integration in Westphalia, 1821-1855," Scandinavian Economic History Review, Taylor & Francis Journals, vol. 63(1), pages 69-92, March.
    16. Pierre Cotterlaz & Etienne Fize, 2021. "Information in the First Globalization: News Agencies and Trade," Working Papers 2021-02, CEPII research center.
    17. David Chilosi & Giovanni Federico, 2021. "The effects of market integration during the first globalization: a multi-market approach," European Review of Economic History, European Historical Economics Society, vol. 25(1), pages 20-58.
    18. 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.
    19. Nils Herger, 2024. "Currency speculation around the opening of the telegraph between London and Paris in 1851," Working Papers 24.07, Swiss National Bank, Study Center Gerzensee.

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    JEL classification:

    • F1 - International Economics - - Trade
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • N7 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services

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