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Dumping in Economics | Price and Output determination in dumping (Eng Rec.)
Abstract
Dumping refers to selling the product in the foreign market at a price lower than in the domestic market. Dumping is undertaken to achieve several objectives (discussed below). A firm can enjoy a monopoly in the domestic market but faces perfect competition in the foreign market. In case of dumping, a monopolist must ensure that the price fixed by him for the foreign market is not so low that the same traders buy it abroad at a cheap price and re-import the same in the domestic market.
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Dumping
Dumping is a special form of price discrimination. It means selling the product in the foreign market at a price lower than in the domestic market. In this case, a monopolist has to face two types of markets. Domestic market over which he has monopoly control, and foreign market where he is to compete with other sellers. Accordingly, he can charge a higher price in the domestic market but in the foreign market, he has to charge a comparatively low price. Dumping is resorted to achieve several objectives, i.e., (i) To compete out rivals in the foreign market, (ii) To take advantage of the law of increasing returns, (iii) To create demand for his product in foreign markets, (iv) To get rid of the surplus stocks of the products, and (v) To take advantage of the difference in the elasticities of demand.
Price and Output Determination Under Dumping
Price and output determination under dumping can be explained with the help of the following diagram. It is drawn on the assumption that there are two markets: domestic market and foreign market. The firm enjoys a monopoly in the domestic market but faces perfect competition in the foreign market. The monopolist will be in equilibrium when his profits are maximum. Profits will be maximum when his total marginal revenue is equal to the total marginal cost as is shown in Fig. 17.
(i) PD horizontal line refers to the average revenue curve (ARW) in the foreign market where perfect competition prevails.
(ii) Marginal revenue is equal to price, i.e., ARW = MRW.
(iii) Because of monopoly in the domestic market, the demand curve is ARH which slopes downward and marginal revenue curve MRH also slopes downward and is below ARH. MC refers to the marginal cost curve of the total output. How much output a monopolist will produce depends on the point where his marginal cost curve cuts the combined marginal revenue curves of domestic and foreign markets. It is this point that will determine his total output. He will distribute the total output in both markets in such a way that his marginal revenue in each market is equal. In this figure, ARTD represents combined marginal revenue. In it AR is the marginal revenue curve of the domestic market, with it, the RTD portion of the foreign market has been joined. ARTD curve is intersected by marginal cost (MC) curve at point T. The monopoly firm, therefore, produces OM total output. Out of this output, the firm will sell OL output in the domestic market and LM output in the foreign market, because then only marginal revenue in both the markets is the same. The monopolist will sell OL output at OP1 price and LM output at OP price. Obviously, the price in the domestic market is higher than the price in the foreign market.
In case of dumping, a monopolist must ensure that the price fixed by him for the foreign market is not so low that the same traders buy it abroad at a...
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By Sivananda PandaAbstract
Dumping refers to selling the product in the foreign market at a price lower than in the domestic market. Dumping is undertaken to achieve several objectives (discussed below). A firm can enjoy a monopoly in the domestic market but faces perfect competition in the foreign market. In case of dumping, a monopolist must ensure that the price fixed by him for the foreign market is not so low that the same traders buy it abroad at a cheap price and re-import the same in the domestic market.
Visit Website: Commerceya
Subscribe on Youtube: Commerceya
Dumping
Dumping is a special form of price discrimination. It means selling the product in the foreign market at a price lower than in the domestic market. In this case, a monopolist has to face two types of markets. Domestic market over which he has monopoly control, and foreign market where he is to compete with other sellers. Accordingly, he can charge a higher price in the domestic market but in the foreign market, he has to charge a comparatively low price. Dumping is resorted to achieve several objectives, i.e., (i) To compete out rivals in the foreign market, (ii) To take advantage of the law of increasing returns, (iii) To create demand for his product in foreign markets, (iv) To get rid of the surplus stocks of the products, and (v) To take advantage of the difference in the elasticities of demand.
Price and Output Determination Under Dumping
Price and output determination under dumping can be explained with the help of the following diagram. It is drawn on the assumption that there are two markets: domestic market and foreign market. The firm enjoys a monopoly in the domestic market but faces perfect competition in the foreign market. The monopolist will be in equilibrium when his profits are maximum. Profits will be maximum when his total marginal revenue is equal to the total marginal cost as is shown in Fig. 17.
(i) PD horizontal line refers to the average revenue curve (ARW) in the foreign market where perfect competition prevails.
(ii) Marginal revenue is equal to price, i.e., ARW = MRW.
(iii) Because of monopoly in the domestic market, the demand curve is ARH which slopes downward and marginal revenue curve MRH also slopes downward and is below ARH. MC refers to the marginal cost curve of the total output. How much output a monopolist will produce depends on the point where his marginal cost curve cuts the combined marginal revenue curves of domestic and foreign markets. It is this point that will determine his total output. He will distribute the total output in both markets in such a way that his marginal revenue in each market is equal. In this figure, ARTD represents combined marginal revenue. In it AR is the marginal revenue curve of the domestic market, with it, the RTD portion of the foreign market has been joined. ARTD curve is intersected by marginal cost (MC) curve at point T. The monopoly firm, therefore, produces OM total output. Out of this output, the firm will sell OL output in the domestic market and LM output in the foreign market, because then only marginal revenue in both the markets is the same. The monopolist will sell OL output at OP1 price and LM output at OP price. Obviously, the price in the domestic market is higher than the price in the foreign market.
In case of dumping, a monopolist must ensure that the price fixed by him for the foreign market is not so low that the same traders buy it abroad at a...
Read More...