Collusive Investments in Technological Compatibility: Lessons from U.S. Railroads in the Late 19th Century
Collusion is widely condemned for its negative effects on consumer welfare and market efficiency. In this paper, I show that collusion may also in some cases facilitate the creation of unexpected new sources of value. I bring this possibility into focus through the lens of a historical episode from the 19th century, when colluding railroads in the U.S. South converted 13,000 miles of railroad track to standard gauge over the course of two days in 1886, integrating the South into the national transportation network. Route-level freight traffic data reveal that the gauge change caused a large shift in market share from steamships to railroads, but did not affect total shipments or prices on these routes. Guided by these results, I develop a model of compatibility choice in a collusive market and argue that collusion may have enabled the gauge change to take place as it did, while also tempering the effects on prices and total shipments.
I thank the Berkeley Economic History Lab and the Harvard Business School Division of Research and Faculty Development for financial support. This research began during graduate studies and was conducted in part with the support of NSF Graduate Research Fellowship Grant No. DGE-1106400 and an EHA Graduate Fellowship. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.