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 nearly 70 percent of their cost savings from standardization, generating a 20 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.
Highlights
Technology standards are pervasive in the modern economy, and a target for public and private investments, yet evidence on their economic importance is scarce
The foremost lesson is that standards can be economically important
Early efforts at computer networking yielded to multiple networks that developed alongside the Internet, each of which used a proprietary naming system for addressing email traffic; intercommunication was enabled by gateways but was so complex that that only the most technical users could do so until these networks adopted the domain name system as a common standard (Greenstein 2015, Partridge 2008)
Summary
As trade between the South and other regions accelerated during Reconstruction, incompatibilities became increasingly costly: by the 1880s, “not a prominent point could be found on the border [of. The first cracks in the 5' 0'' network developed in 1884 and 1885, when two major lines linking the South to the Midwest (the Illinois Central and the Mobile & Ohio) converted their tracks to standard gauge, increasing pressure on their Southern competitors and connections to follow suit, and providing a template for execution. By midday on June 1, 13,000 miles of track had been converted to 4' 9'', and traffic had resumed, with freight moving freely across Southern borders in a physically integrated railroad network.. The cartel served three important roles that enabled conversion to take place It provided an institutional venue for coordinating on a common gauge and organizing the conversion, similar to SSOs today. Without either collusion or consolidation, the gauge change itself would be in question, and integration would likely have been significantly retarded
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