Let us make an in-depth study of Dumping in Price Discrimination:-
1. Meaning of Dumping 2. Conditions for the Success of Price Discrimination in Dumping.
Meaning of Dumping:
Dumping is another type of price discrimination in the arena of foreign trade.
It implies different prices in the domestic and foreign markets. Dumping takes place when a monopolist sells a portion of his output in a foreign market at a very low price and the remaining output at a high price in the home market.
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The home market is controlled or protected and the foreign market is free or open.
Haberler defines dumping as “the sale of a goods abroad at a price which is lower than the selling price of the same goods in the same circumstances at home, taking account of difference in transport cost.”
Causes behind dumping is that it enables the exporter to compete in foreign market and to captive the market by selling at a low price; even sometimes below cost and to make the deficiency in sales revenue by charging a high price to the home buyers taking advantage of his Monopoly position in the market.
In fact, the higher domestic price serves to subsidize a segment of foreign price, which helps considerably by promoting exports. Export earnings may, however be made available to promote the growth of home industries which otherwise would not have been possible.
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Moreover, by resorting to dumping, when the producer is able to widen the size of foreign markets for his product, his investment risks are minimised and when he has to launch large-scale production, he can reap the economies of large-scale resulting in cost minimisation. Eventually, in the long-run, it may become possible for him to sell his goods at a cheaper price in the domestic market as well.
Conditions for the Success of Price Discrimination in Dumping:
Price discrimination in dumping depends on the following conditions:
1. The product must have a degree of Monopoly at least in the home market.
2. There must be clearly defined separate market. In international trade, markets are clearly differentiated between home and foreign markets. In fact, in international trade markets are separated by space, differences in customs, nationality, language, currency etc.
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3. It should not be possible for buyers to re-sell goods from a cheaper market to a dearer one. In foreign trade, of course, the distance transport cost element and customs duties prevent this tendency.
4. Price discrimination is profitable only when two different markets have different elasticities of demand. It is meaningless to resort to price discrimination if two separate markets have identical demand curves because under such conditions, the total sale receipts will not be affected by shifting to a uniform price policy.
Regarding Dumping Stigler has said that:
“Under dumping the producer with a marginal revenue in the home market and foreign market set a price equal to marginal cost and with price related to marginal revenue by the equation:
MR = P (e – 1/e), where e is the elasticity of demand. Thus, different prices will be set for both the markets to derive maximum profits.