Research on Vertical Integration Based on Scarce Supplies and Overcapacity

Scarce supplies and overcapacity are the main characteristics of many industries in transition economies. This paper focuses on the motives, conditions and impacts of vertical integration under these characteristics. Based on the extension of Hart-Tirole model, we show scarce supplies create motivation for vertical integration, and the motivation is decreasing with the M&A cost. Eager bandwagon becomes possible while certain conditions are satisfied. Vertical integration may foreclose the surplus capacity out of market, and the likelihood is increasing with the downstream investment cost. At last, we check the adaptability of these suggestions to Chinese aluminum industry, and points out the influence of government intervention on the adaptability.