What is Dumping?
Dumping is a practice of selling the product at a lower price in the foreign market than in the domestic market. So, it is a type of third-degree price discrimination where the market is divided into domestic and foreign.
Dumping is a practice used by a firm to:
- Penetrate the foreign market being competitive.
- Vent for surplus of the unsold products in the domestic market.
- To compete with local products in the foreign market.
- Protection in the domestic market or maybe some monopoly domestically, but there is no such power in the foreign market.
- Bad intention of the firm to compete in the foreign market strategically in the long run.
To explain the price and output determination under dumping, assume that the firm has monopoly power in the domestic market and faces perfect competition in the foreign market.
Here,
- ARd and MRd are demand and marginal revenue of the product in domestic market.
- Similarly, Df and MRf are the demand and marginal revenue of product from foreign market.
- As foreign market is perfectly competitive, the demand curve of the firm is perfectly elastic.
- MC represents the marginal cost of the production which is same for either the firm sells in foreign market or in domestic market.
- As the objective of the firm is to maximize the profit by selling in both in domestic market and in foreign market, it determines the profit maximizing output using the marginalist principle of profit maximization.
- Both conditions of profit maximization are satisfied at E*implying that OQ* is the profit maximizing output.
- Now, the firm allocates this profit maximizing output between domestic and foreign market in such a way that the marginal revenue from each market equals to equilibrium marginal cost of the firm.
- As in the figure, the firm supplies OQd quantity at Pd price into domestic market and supplies OdQ* quantity in the foreign market at Df price, which is given to the firm due to perfectly competitive foreign market.
- When the firm allocates profit maximizing output in domestic and foreign market in such quantity so that MRd = MRf = MC
- Since, price in the foreign market is less than that in domestic market, it is dumping.