Vertical vs. horizontal integration: Game analysis for the rare earth industrial integration in China

Abstract

Rare earths are important strategic mineral resources and have been widely used for economic development and national security. The Chinese government has carried out some policies to promote the process of rare earth industrial integration. Our study constructed a two-stage game-theoretic model to analyze the industrial integration tendency of rare earth firms. Three integration scenarios have been established, including no integration, horizontal integration between upstream firms and vertical integration between upstream and downstream firms. The results show that firms and the Chinese government prefer different modes of rare earth industry integration. For rare earths firms, they would like to carry out horizontal integration to maximize their profits, while the Chinese government would encourage the vertical integration between upstream and downstream firms to realize the maximization of social welfare. Finally, the Chinese government would like to make out some policies to guide the rare earth firms to implement vertical rather than horizontal integration.