Economies of Scale and Endogenous Market Structures in International Grain Trade

A large body of literature has examined international grain trade in imperfectly competitive models. The model developed in this paper differs from previous ones, since it specifically considers the export strategies used by multinational firms, which maintain a direct control over all importing/exporting functions; this strategy requires high fixed cost but allows firms to avoid the transactions costs arising from negotiating with downstream operators. The model considers a multinational firm and a state trading enterprises competing on a foreign market in a two-stage duopoly framework; while the Ste is assumed to export only indirectly, the multinational firm chooses between indirect and direct exports, according to the relative values of transaction and fixed costs. The results of the game are examined by using numerical examples. The examples show that external shocks on export markets affecting the relative values of transaction and fixed costs of the international grain trading, may result in a change of market structures and, consequently, of market shares. These effects depend on the initial market structure. The assumption that there is a gap between firms' domestic costs does not significantly change the outcome of the game. The effect of a worsening of the Ste's competitive position, in relation to that of the multinational, depends again on the starting market structure. On the whole, the analytical framework developed herein has a number of interesting policy implications for the ongoing WTO negotiations in the DDA round about the possible effects of regulating Ste.