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, 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.

Date: 2007
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