Optimal Trade Policies and Production Technology in Vertically Related Markets *

Hong Hwang, Yan-Shu Lin and Ya-Po Yang

Review of International Economics, 2007, vol. 15, issue 4, pages 823-835

Abstract: This paper shows that optimal trade policies for vertically related markets depend crucially on production technology. By employing a production function with variable-coefficient technology, it shows that return to scale is crucial in determining the direction of government intervention. Therefore, the assumption of fixed-coefficient production technologies, which has been popular in industrial organization and trade literature when modeling vertically related markets, should be used with caution. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

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