Coal Enterprises Strategic Alliance And Vertical Integration Research

In2007, the price control on coal for generating electricity was abandonedcompletely in China, which indicates the termination of the situation that electricitywas supported by coal, and the beginning of complete marketalization of coal. But theconflict between coal and electricity industries does not come to an end even in lightof this.The government has been attempting to unleash the price control on coal since2002. The macro economy developed in a rapid speed during the same period, and thefast development of steel and cement industries brought tremendous demand forelectric power. This increased demand, through upward transmission in thecoal-electricity chain, incurred immense demand for coal too. While the supply ofcoal decreased under the policy of closing coal mine to curtail output. Under thebackground of drastically increased demand and decreased supply, the price ofelectricity-coal went up sharply, and so was the electricity-generating cost. Under thedual-track mechanism of the price for coal and electricity, the profit ofelectricity-generating plant decreased generally, and some even made a loss. The twoparties usually couldn’t reach an agreement on the price of electricity-coal, whichcaused electricity nationwide shortage. Shutting off switch to limit use reached itspeak in2004, which seriously influenced the sustainable development of nationaleconomy. Confronted with new problems of macro economy, the government tried tomediate the price of electricity-coal in one hand, and enforced linkage policy for theprice in other hand, but the result is quite poor.This paper, through the analysis of the price mechanism of coal and electricity inChina, attempted to find the roots of the interest conflict between coal and electricityindustries: the dual-track mechanism of the price and the drastic fluctuation ofdemand. We employed the theory of transaction cost economics, strategic alliance andregulation to analyze the asset-specific characteristics, market structure,price-forming mechanism, demand fluctuation and government regulation. Ourresults show that the price linkage between coal and electricity can merely alleviatethe conflict temporarily. In the long run, to establish alliance or vertical integration,according to specific conditions, is an efficient method of solving the conflict throughproper institutional arrangement.