Abstract: During our current transformation period, government plays a crucial role in the management of state-owned assets, based upon this background and existing enterprise-group theories and definitions of vertical enterprise groups, an abstract assumption is made about the activities of both government and enterprises in the transformation period from planned economy to market economy. Besides, a basic model is designed to reflect enterprise activities so as to include these activities into the analytical framework of dynamic competition. Then a deep discussion about both internal and external dynamic mechanism is carried out with the safe conclusion achieved that vertical enterprise groups owe their birth to the mutual win-win relation among enterprises, enterprises and government, while what hinders the mutual win-win relation is our current segmental administrative system and the system of tax distribution.

Key words: vertical integration, cause of formation, target maximization, gambling analyzes, power mechanism, management engineering