Dumping

Dumping

Dumping. • While discussing price discremination we presented such a model where monopolist has monopoly in both the market. ( although there is difference in the elasticities of demand). • Now we present such a model of P.D. which is known as ‘Dumping’.

• Dumping is special type of monopoly where an international monopolist, in order to capture the foreign markets, sells his products cheaper in the foreign markets as compared to his domestic market. • Thus to sell the products cheaper in the foreign market as compared to the domestic market is called the strategy of dumping.

• To explain such model we assume that the producer has monopoly in domestic market where the demand for his products is less elastic. • While in foreign markets the producer has to face competition where the demand for his product is more elastic. • Because of monopoly in domestic market, the monopolist will charge high price.

• While in foreign markets because of competition, the producer is just like a ‘price-taker’ firm where he has to sell at a given price. • We present this diagram to demonstrate dumping.

A monopolist firm sells in two markets, i.e ,domesticand foreign markets.In foreign market,the demand is perfectlyelastic as shown by DF=MRF,whi;e the demand in which is less elastic.The markets are segmented so that the firm can charge a higher price for the domestically sold goods than it does for exports.

MC is the marginal cost curve for the total output, which can be sold on either market. The firm's profits will be maximised when the firm sets MR in each market equal to MC. Thus to set MC equal to MR in both markets it is necessary to produce QT.

Out of this, QH will be sold in domestic market which is determined by EH where total MC=MRH. The remaining output, i.e.,QT-QH will be exported by the firm at the constant foreign price PF.

Here MC=PF(MRF) which in turn is equal to MRH. Corresponding to domestic demand (QH) we have the domestic price (PH) shown by the point A on DH (domestic demand) curve. As in foreign market an additional unit can always be solid at PF, the firm increases output until MC-PF.

Since firm's MC is PF, it sells output in domestic market when MR=PF. This happens at EH ,where the domestic sales is QH. Thus the rest of the output ,QT -QH will be exported.

The price at which the domestic consumers demand QH is PH. Since PH>PF,the firm exports at a lower price than it charges domestic consumers. Thus the firm is indeed dumping------selling more cheaply abroad than at home.