The term Dumping means selling a firms product in foreign market at a price lower than in the home market. Dumping is a form of price discrimination. Let us elaborate ‘dumping’ by considering the following illustrations :
Suppose the producer is selling in two markets; viz, the home market and the world market. In the home market he is saddled as a monopolist but in the world market there is perfect competition. Let us therefore analyse the price-output policy of the producer under this peculiar situation. Since there is perfect competition in the world market, the producer has to take the price which prevails in the world market. This is represented by the horizontal average revenue curve ARw and the marginal revenue curve coincides with the average revenue curve. Thus ARw = MRw. However, in the home market he is a monopolist and therefore average revenue curve slopes downwards and the marginal revenue curve lies below it, both represented by ARH and MRH respectively. Given the MC curve the producer is in equilibrium at point E where combined MR = MC.
The total profit maximizing output is OM. He sells OH in the home market and HM in the world market; because up to H unit of output the marginal revenue in the home market is higher than the marginal revenue from the world market. But beyond the H unit he sells in the world market to enjoy higher marginal revenue from the world market. OH + HM exhausts his total output OM. Regarding the price, the producer is helpless as far as the world market is concerned because there is perfect competition and he is only a price-taker. He has to take OPw as the price in the world market. However, in the home market the price is OPH corresponding to the output OH. The price in the home market is higher than the price in the world market. i.e. OPH > OPw. This implies that the producer is selling his product in the two markets at different prices. In other words, he is practicing price discrimination. The total profit is shown by the area ZTEG.
This act of selling the product in a foreign market at a price lower than in the domestic market is called Dumping. Dumping may be either persistent in nature i.e. over a long period or intermittent in nature, i.e. only for a temporary short period.
Reasons for Dumping
- The aim of the discriminating monopolist is to maximize profits. Initially he earns higher MR for his product when he sells in the home market. But if he continues to sell more in the home market then the MR from home market will be much lower than MR from the world market and hence to maximize profits he cuts short his sales in the home market to OH and prefers to sell HM in the world market. Thus, he can sell larger output and also hope to maximize profits.
- There is the possibility that as the producer goes on producing more units, he enjoys economies of scale which would help him in lowering the average cost. To minimize cost and optimize output he will produce upto the point where AC is minimum. Now all that he produces may not be demanded in the home market and therefore he will sell as much is needed to be sold at home and the remaining could be sold (dumped) in the foreign market even at a little lower price than the price at which it is sold in the home market.
- Thirdly the producer wants to penetrate the foreign market and hence sells his product there at a relatively lower price.
- An important reason for dumping is that the producer may not just want to enter the foreign market but even try to capture the foreign market. This will be disadvantageous to these foreign markets where the product is dumped. The buyers there may then turn to buy the foreign product which is being sold at a lower price than the product of their home industry. The infant-industries there tend to suffer. Due to fall in their domestic demand industries have to close down. There will be threat of unemployment and all this may lead to recession and even depression. The country where the product is dumped will resort to imposing tariffs on imports as an important anti-dumping measure.