Strategic motives for vertical separation: Evidence from retail gasoline markets

Manufacturers can choose to remain separate from their retailers for both incentive and strategic reasons. In this article, strategic motives for vertical separation are examined empirically. Two datasets are used for the assessment. The first is a cross section of all contracts between private, integrated oil companies and their branded service stations in the city of Vancouver, whereas the second is a panel of price and sales data for a subset of the firms in this market. I find that operators or stations that could potentially realize an improvement in price/cost margin due to separation are more likely to be given the authority to set retail prices.