Local Market Structure and Strategic Organizational Form Choices: Evidence from Gasoline Stations

Federal Trade Commission, Bureau of Economics, Working Paper No. 311, March 2012

41 Pages Posted: 17 Mar 2012

See all articles by Nathan Wilson

Nathan Wilson

Government of the United States of America - Federal Trade Commission, Bureau of Economics

Date Written: March 23, 2012

Abstract

An extensive literature shows that agency issues and transactions costs influence vertical integration. Another mature literature indicates that market structure influences competitive behavior. However, less consideration has been given to how vertical integration and market structure may interact. I address this gap by focusing on the potential for moral hazard caused by intra-firm competition in retail gasoline markets. I argue that when multiple stations share a common brand in a market, a vertically separated station has an incentive to deviate from the cooperative strategy that the brand-owning refiner would prefer. I empirically test this prediction using rich data, and find evidence of such moral hazard. Moreover, I find that refiners behave in a way consistent with the desire to minimize it: They are more likely to employ vertically separated contracts in markets where the number of affiliated stations is small.

Keywords: Gasoline, moral hazard, vertical contracting, price setting

JEL Classification: D2, L14, L22, L81

Suggested Citation

Wilson, Nathan, Local Market Structure and Strategic Organizational Form Choices: Evidence from Gasoline Stations (March 23, 2012). Federal Trade Commission, Bureau of Economics, Working Paper No. 311, March 2012. Available at SSRN: https://ssrn.com/abstract=2022333 or http://dx.doi.org/10.2139/ssrn.2022333

Nathan Wilson (Contact Author)

Government of the United States of America - Federal Trade Commission, Bureau of Economics ( email )

600 Pennsylvania Avenue, NW
Washington, DC 20580
United States
202 326 3485 (Phone)

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