Upstream-Downstream Specialization by Integrated Firms in a Partially Integrated Industry

We propose a simple model of a partially integrated industry which explicitly takes into account persistent production cost differences across upstream firms, such as one might observe in natural resource industries. The model allows us to highlight the respective roles of strategic considerations and of cost considerations in the determination of an integrated firm's interaction with the non-integrated sector of the industry and, in the end, on its relative upstream-downstream specialization. Some crude stylized facts from the world oil industry are used to motivate and illustrate the analysis.