Disciplining exporting State Trading Enterprises under economies of scale and oligopoly

The paper develops a two-stage duopoly model to investigate the effects of eliminating subsidies to state trading enterprises (STEs) as discussed in the WTO Doha Development Agenda negotiations. The model builds on the game theoretical models of international trade that include multinational firms (e.g. Horstmann and Markusen, 1992; Motta, 1992; Markusen, 2002), even though the setting is substantially different, since while in the aforementioned models, private firms invest in the foreign countries to jump the tariffs, in this paper the motive for international integration is the presence of transaction costs. Furthermore, all papers mentioned above assume constant domestic costs and symmetry between firms, whereas this paper introduces increasing marginal costs and asymmetry in firm behaviour and objective functions. The theoretical model is used to study how the elimination of STE subsidies affects market structure. The trade and welfare effects of possible market structure changes are examined by means of numerical examples. The results show that the elimination of subsidies to the STE may have different impacts on market structure, trade and welfare, depending on the initial values of transaction and fixed costs and of the subsidy.