Posted in Finance Articles, Total Reads: 4060
, Published on 08 November 2012
Dumping actually refers to the means of selling the product in the foreign market at a price lower than that in the home market. There are various types of dumping:
Sporadic Dumping: This refers to the occasional sale of a product in the world market at a price below the home market price in order to take down an unanticipated and temporary surplus of the commodity without actually having to decrease the domestic prices.
Predatory Dumping: This refers to the short-term sale of a commodity at a lower price in the world market in order to drive away the foreign producers out of business. Later, the prices are raised to take benefit of the monopoly power in the foreign country.
Persistent Dumping: This refers to the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally.
To understand this concept in detail, let us take a look at the following graph.
Consider that the producer is selling goods in two markets – the Home Market and the World Market. In the Home market, the producer is established as a Monopolist and hence is the price – maker. However, perfect competition exists in the world market, and hence in the world market the producer is a price – taker and not a price maker.
The price in the home market is PH and the price in the world market is Pw. Due to the perfect competition, in the world market, the average revenue curve ARw and marginal curve MRw are horizontal and they coincide i.e. ARw=MRw. However, the scenario in the home market is different than this as in the home market the producer is a Monopolist. Hence, the average revenue curve ARH slopes downwards and the marginal revenue curve MRH lies below it. It can be observed that the point E is the point of equilibrium for producer as it the point of intersection of both the marginal revenue curves (MRH & MRw) and the marginal curve MC.
Thus the producer produces OM quantity of products in order to maximize his profit. However, out of those OM products, the producer sells only OH quantity of products in the home market and sells the remaining HM quantity of products in the world market. This is because up to H units, the marginal revenue in the home market is higher than the marginal revenue in the world market. But beyond H units, the marginal revenue in the world market is greater than that in the home market. Hence, the producer has to take the price of the product as Pw for the output of HM quantity of products in the world market and as PH for the output of OH quantity of products in the home market. Thus we can see that the price of the product is higher in the home market and lower in the world market. This means that the producer is selling the same product in two markets at two different prices. This is called as Price Discrimination. And the act of selling the product in a foreign market at a lower price than the price in the domestic market is called as Dumping.
Usually dumping is considered to be a negative term as it has a distressing impact on the country in which the product is being dumped. Even though the advocates of a free economy consider dumping as beneficial for the buyers and believe that protectionism to prevent it would have net negative consequences, however a larger section of economists believe that such trade practices hamper home industry. Dumping results in hurting the producers and industry of the country in which the commodity is being dumped. It influences the sales volume, damages the market shares, prompts decline in profitability and finally results in job losses. Due to these reasons, countries have incorporated strict anti – dumping measures. The whole idea of anti – dumping measures is to support the domestic producers. Anti – Dumping reinstates fair trade and fair competition. It also provides protection to the domestic producers and the industry. It rectifies unfair trade practices pertaining to dumping.
This article has been authored by Supriya Gunthey from Welingkar.
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