The Effects of Vertical Integration on Oil Company Performance

The oil industry has always been fertile ground for an analysis of the reasons for and effects of vertical integration. One of the reasons for this popularity is that stages of production are easily differentiated. Furthermore the association between market power and integration, usually made by the public, is believed to be evident in the case of the oil industry. The perception is that integration is a requirement for company success as the oil industry is populated by large integrated companies that make “excessive” profits. The identification of market power with vertical integration was taken as an axiom by regulatory agencies in the 1970s and has only recently been abandoned (Yarrow (1991)). For example, the US oil industry was the subject of a complaint by the Federal Trade Commission in 1973, and of a prior report that recommended divestiture as a means to control the anticompetitive strategies of the participants (Teece (1976)).

By: F. Barrera-Rey

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