Dumping and its Types

In international market some countries get command over some particular technology or technique of production. As a result such countries get monopoly over these goods or technologies. The special type of such international monopoly is Dumping. Because of dumping the monopolists n order to capture foreign markets, sells his products cheaper in the foreign market. This policy is adopted when the seller has monopoly in the domestic markets where the demand for his product is less elastic. While the seller has to face perfect competition in the world markets where the demand for his product is more elastic. Thus if producer sells its product cheaper in the world market as compared with domestic market it would be called ‘dumping’. Accordingly if Japan sells its cellular phones in cheaper in US markets as compared with its own market it would be case of dumping.

Types of Dumping:

There are three types of dumping, which are discussed below.

1. Persistent Dumping: This type of dumping is concerned with the motive of maximization of profits of the monopolists who knows that national and international markets are segregated because of transport costs, tarrif and other restrictions on trade. The monopolist faces more substitutes at world level. Therefore, the demand for monopolist product becomes more elastic. While in domestic market the demand is less elastic, because of non-availability of substitutes. Accordingly, the monopolist charges higher price in local market and lower price in world markets.

2. Sporadic Dumping: Such type of dumping is concerned with occasional price discrimination. If the excess stock of a product develops with a firm either due to excess capacity or improper planning of the firm to sell it the firm has no choice to lower its world price. So this dumping may be treated like ‘International Sale’. This is commonly observed in case of agricultural exports. If any time the cotton crop is bumper in Pakistan and we are in need of foreign exchange the cotton is sold in the world markets even at the price which is lower than domestic price.

3. Predatory Dumping: This is an unfair method of competition through international price discrimination. Such type of dumping occurs when a producer in order to get hold over the world markets throws away its rivals. For this purpose it deliberately sells its product cheaper, though for a shorter period. While doing so it assumes that when the competitions run away it will earn abnormal profits by raising prices. Accordingly, it is a temporary price discrimination. The logic behind discrimination is this that the monopolist will be able to maximise its profits in long run, even if it is facing losses in short run.

Market behaviour under Persistent Dumping:

Total equilibrium of the monopolist has been presented which takes place at E where MC curve intersects MR curve. As a result OQT output is settled which is to be sold in domestic and foreign markets. In the part 2 of the figure we have the situation of foreign market where the demand is more elastic. Here equilibrium takes place at ‘ef’ where it charges ‘Pf’ price. In the 3 part of the figure we have the situation of domestic market where demand for monopolist’s product is less elastic. Hence the equilibrium takes place at ‘ed’ and the price charged is ‘Pd’. It is obvious that because of difference in domestic and foreign demand the monopolist charges different prices for his product. This is price discrimination where domestic price is more than world price. This whole situation is concerned with the phenomenon that the monopolist begins with discrimination of output which he is to sell in two geographically separated markets.

Now we make another case where it is assumed that the monopolist has a specific amount to sell following micro-economics we know that each firm wants to maximize its profits. Accordingly, a firm will determine its output where the difference between revenues and costs is maximized. Now the question is how the revenues of the firm having a fixed quantity can be maximized which is to be sold in two separate markets. Apparently, monopolist will sell his product in domestic and foreign markets in such a way that MR of the last unit sold in the domestic market must be equal to the MR of the last unit sold in the foreign market. If this does not happen the monopolist will transfer the units of his product from the market where MR is lower to the market where it is higher.

Therefore to solve the issue of fixed output in domestic and foreign markets the MR curves of monopolists both in domestic and foreign markets have been summed horizontally in the part (1) of the figure which is shown by ∑MR. Thus the monopolist determines his output which will be sold by him in two markets. Thus OQT is the summation of its sales OQf and OQd. In other words out of its total sales OQT and OQf is sold in foreign market and OQd is sold in domestic market. It is obvious that monopolist is charging higher price from domestic market while the price charged from foreign market is lower.