Vertical integration and profitability in the oil industry

Several economists have argued that considerations of efficiency in production and transactions favor vertical integration in the oil industry. Others maintain the vertical integration enhances market power. To simultaneously test the implications of both arguments, data are assembled on the structure and performance of a sample of the large U.S. in companies over a twenty five year period. No support is found for the hypothesis that profit rates are increased by the degree of vertical integration between crude oil production and refining, but there is weak evidence that the variability of profits is reduced. The paper goes on to examine evolutionary evidence, concluding that the present pattern of vertical integration was largely shaped by adaptations to unique circumstances during historical periods when vertical integration was temporarily favored on efficiency grounds.