Research on vertical integration under overcapacity

Overcapacity is the main characteristic of many industries in transition economies. This paper focuses on the motives and impacts of vertical merger under this characteristic. Based on the extension of Hart-Tirole model, we show upstream overcapacity creates motivation for vertical merger, and the motivation is decreasing with the M&A cost. Eager bandwagon becomes possible while certain conditions are satisfied. Vertical merger 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.