The Ties that Bind: Railroad Gauge Standards, Collusion, and Internal Trade in the 19th Century U.S.

Abstract

Technology standards are pervasive in the modern economy, and a target for public and private investments, yet evidence on their economic importance is scarce. I study the conversion of 13,000 miles of railroad track in the U.S. South to standard gauge between May 31 and June 1, 1886 as a large-scale natural experiment in technology standards adoption that instantly integrated the South into the national transportation network. Using route-level freight traffic data, I find a large redistribution of traffic from steamships to railroads serving the same route that declines with route distance, with no change in prices and no evidence of effects on aggregate shipments, likely due to collusion by Southern carriers. Counterfactuals using estimates from a joint model of supply and demand for North-South freight transport suggest that if the cartel were broken, railroads would have passed through 50 percent of their cost savings from standardization, generating a 10 percent increase in trade on the sampled routes. The results demonstrate the economic value of technology standards and the potential benefits of compatibility in recent international treaties to establish transcontinental railway networks, while highlighting the mediating influence of product market competition on the public gains to standardization.