The “raising rivals’ costs” literature predicts that vertically integrated firms have an incentive to generate profits in downstream markets by increasing wholesale prices to competing retailers. We test this theory using data on wholesale gasoline prices. The 1997 acquisition of Unocal’s West Coast refining and marketing assets by Tosco Corporation generated discrete and differential changes in the extent of Tosco’s vertical integration into thirteen West Coast metropolitan areas. This event permits identification of the price effects of vertical integration, controlling for the effects of horizontal market structure, cost shocks and trends, and potentially confounding city-specific covariates. We find that Tosco increased the wholesale price of gasoline more in cities where it faced greater competition with independent retailers following the acquisition. These results are consistent with the strategic incentive to raise competitors’ input costs and show that the
extent of a wholesaler’s vertical integration into downstream markets can have a significant impact on upstream market conduct.

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