Nova workboard

a blog from young economists at Nova SBE

Innovations from a microeconomic perspective: – A brief case study on the rise and fall of the 19th CE frozen water industry (or how Frederic Tudor set a real-life example for microeconomic theories)

In the New England of the 19th century ice was a luxury good exclusively targeting the upper class able to afford its own ice houses. Enjoying a drink cooled by natural ice harvested from the lakes of New England, Frederic Tudor was feeling pity for the colonists in the West Indies unable to enjoy the same amenity. To make up for that, in 1806 he shipped tons of Ice to the Caribbean (of course, he was accused of being mad), and made the expensive experience that the supply was not meeting any demand. Tudor first had to create the demand by changing consumer preferences from warm to cold drinks (see fig. 1). He did such a good job in doing so during the next two decades that by 1833 he was not just supplying all parts of America with ice, shifting it from being a luxury good to a normal good, but that he was even shipping ice to Calcutta, India. However, with this move competition had entered the marketplace causing decreasing profits for Tudor. In order to keep his monopolistic advantages he made use of his market power– in highly competitive regions he simply dropped the price that low that competition was forced to leave the marketplace – they knew that he could balance out losses with his other operations (he already seemed to have a great understanding of what later got to be formalized as a strategy derived from game theory, see fig. 2). As if that was not enough, Tudor recognized that ice could not just be used to run stationary ice houses but that mobile ice houses could be used for transportation. As a result, he used the ice he was not able to sell in the West Indies to cool down fruits on the way back, which he then sold in New England. Thus, he found out about the interdependence of markets as shortly after the meat, fish, fruit and even the beer market (as now ice allowed to produce lager beer all year long, not just in the winter) experienced remarkable growth as prices were decreasing caused by the improvement of transportation and storage methods (see fig. 3). California was enjoying the gold rush, and Rockefeller was about to discover oil in the Mid-East. But for now, ice from New England was the biggest export industry of the US. However, the global demand for New England’s “frozen water” was increasing too fast; supply was not able to keep up. To do so, production processes and sources were to be improved, some amendments were more, others less successful (horse-pulled ice cutters proved to be efficient, harvesting from passing icebergs did not, neither was it reliable). Additionally, to improve transportation and durability of the ice  (one should note the long sea routes to Calcutta, Rio de Janeiro, Hong Kong or Sidney) other methods attracted attention such as making use of mechanical equipment to lower temperatures. Furthermore, some innovative thinkers were even experimenting with producing “artificial” ice (of course, they were accused of being mad). Indeed, by the end of the 19th CE technological innovations increased efficiency, facilitating to produce artificial ice at competitive prices. Thus, one could assume that the established producers from the north were quickly adapting the new method – but they did not. Instead, they waged a war of technologies by focusing on the improvement of their old-fashioned methods.  However, the new technology proved to be a disruptive technology (see fig.4), and by the mid of the 19th CE not a single natural ice company was still in the market, not even the Tudor Ice Company [1] (Frederic Tudor, who forever will be known as the “Ice King”, might have recognized the new opportunity, but unfortunately he had already died in 1864 as a mad, but rich man).

Hans Kaufmann

[1] Remark: The observant reader might recognize similarities to Apple’s Iphone/Smart Phone being a disruptive technology pushing former market leaders nearly to bankruptcy, since for instance Nokia didn’t believe in the new technologies. However, Philips or Siemens lighting branches, for instance, did understand the concept of disruptive technologies by heavily investing in F&E activities regarding LED or OLED technology, now starting to benefit from these wise investments.


Author: studentnovasbe

Master student in Nova Sbe

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