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