Economies of scope in vertical integration: The case of the petroleum industry

Thesis/Dissertation · Sun Jan 01 04:00:00 EST 1989

OSTI ID:6840063

Song, J G

This study extends the multiproduct cost theory to the case of vertical integration by considering the existence of transaction cost and technological interdependence between different production stages. Using the multiproduct cost theory, which includes vertical integration, the integrated multiproduct cost functions for domestic petroleum producers are estimated. Based on the estimated cost functions the structure of cost in the US petroleum industry is analyzed. The multiproduct cost functions are estimated by both quadratic and modified translog cost functions. On the basis of the empirical results of the US petroleum industry, several conclusions and implications are drawn. First, there exist vertical economies of scope in the US petroleum industry. Second, most integrated petroleum companies enjoy global economies of scale with the aid of the high degrees of cost savings through vertical integration. Thus, vertical divestiture in the US petroleum industry should be abandoned as a policy alternative. Third, since the results show that large size companies seem to have more incentive to expand refining operations and small size companies seem to have more incentives to expand the crude oil production, we may expect that the crude oil market becomes less concentrated while the refining industry becomes more concentrated.

• Research Organization: Georgia State Univ., Atlanta, GA (USA)
• OSTI ID: 6840063
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
294002* -- Energy Planning & Policy-- Petroleum
CHEMICAL ANALYSIS
COST BENEFIT ANALYSIS
DATA
ECONOMY
INDUSTRY
INFORMATION
MULTI-ELEMENT ANALYSIS
NUMERICAL DATA
PETROLEUM INDUSTRY
STATISTICAL DATA
VERTICAL INTEGRATION