Dumping- Meaning, Purpose, Price Determination etc.
Meaning
A specific example of price discrimination is dumping under which there are two markets available to the monopolist. In one market, the monopolist has no competitor while in the second he will have to face competition. For instance, for instance, the monopolist may be the sole seller in the home market while in the foreign market that will be faced with a situation of stiff competition. In a situation like this the monopolist will normally fix a lower price of his goods in the foreign market to earn maximum net monopoly revenue.
It should be remembered here that dumping is not essentially confined to foreign and home markets alone. It is possible that monopolist may get some protected market where he would be in a position to charge a higher price for his product. On the other hand, in world markets he will have to sell his goods at a lower price. This situation too is a case of dumping. In fact dumping means selling out of goods at lower price in the market.
Conditions favourable to Dumping
There are two basic conditions for the success of dumping: (1) the monopolist should have access to protect markets and (2) Elasticity of demand for the product in the protected market should be less to enable him realise higher price in it.
Purpose of Dumping
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Larger production:
Dumping is resorted to dispose of the surplus product. At times the calculations of the monopolist do not turn out to be true resulting in over-production forcing the seller to sell the excess product in foreign market at reduced prices.
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To overcome competition:
Yet another purpose of dumping is to drive away likely competitors from the unprotected market. This could be achieved by selling at a lower price in unprotected market.
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Expansion of productions:
Dumping is adopted to take advantage of increasing returns. Monopolist may expand production and enjoy the benefit of decreasing cost and the surplus production will be sold in foreign market at reduced Price.
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Availability of favourable conditions:
Dumping is also resorted when there are appropriate conditions for price discrimination. For example when the elasticity of demand for the commodity is more in foreign markets as compared to home market, dumping is practised.
Period of dumping
Dumping will be temporarily used in the first two situations. In the first case dumping will cease when the surplus stock of the commodity is exhausted. In the second case it will be terminated with the exit of competitors. Dumping may continue to exist in the third and fourth case for indefinite period.
Price determination under dumping
In figure the price determination under dumping is shown. We have assumed that the monopolist is faced with competition in the home market.
Curves AR1 and AR2 are the demand curves facing the seller in home and foreign market MR, and MR are respectively the marginal revenue curve facing the monopolist in the home and foreign markets. Output QQ1 is sold in home market at P₁Q₁ price which is higher than the price P₂Q₂. The marginal revenue of production QQ1 sold in home market is equal to the price P₂Q₂ obtained in the foreign market.
Q₁P = P₂Q₂
Measurement of Monopoly Power
All monopolists do not have the same class. Some of them are more powerful while some are less powerful. Therefore, the ability to influence price is not uniform in all cases.
- The more the variation between marginal cost and price, the monopolist power will also be correspondingly higher.
- Powerful monopolists are able to obtain larger monopoly profits.
- Where the elasticity of demand is less, the extent of monopoly power will be more.
Important links
- Market- Definition, Features & Factors Affecting its Size
- Traditional Theory of Costs- Short-run & Long-run
- Perfect Competition- Definition, Equilibrium firm & Conditions
- Equilibrium of an Industry in the short remand Long-Run
- Equilibrium of Monopoly- Short & Long Period Equilibrium
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