Disciplining Exporting State Trading Enterprises Under Economies of Scale and Oligopoly

The paper develops a two-stage duopoly model to investigate the effects of the elimination of subsidies to State Trading Enterprises (STEs) as discussed in the WTO Doha Development Agenda negotiations on agriculture. Unlike the STE, the private firm may choose to integrate vertically in order to avoid transaction costs arising from dealing with downstream operators. The theoretical model shows that eliminating subsidies to the STE may induce a change in market structure and not necessarily lead to increased competition. In fact, if transaction costs are large enough relative to fixed costs, then the result may be a monopoly by the private firm