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

An extensive literature shows that agency issues and transaction costs impact vertical integration decisions. Another mature literature indicates that market structure influences competitive behavior. 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 arising from intra-firm competition. Focusing on retail gasoline sales, 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 both such moral hazard and the desire to avoid it.