Dumping – Meaning, Types, Price Determination and Effects of Dumping

Dumping is an international price discrimination in which an exporter firm sells a

portion of its output in a foreign market at a very low price and the remaining
output at a high price in the home market Haberler defines dumping as: “The sale
of goods abroad at a price which is lower than the selling price of the same goods
at the same time and in the same circumstances at home, taking account of
differences in transport costs” Viner’s definition is simple.
1. Meaning of Dumping:
Dumping is an international price discrimination in which an exporter firm sells a
portion of its output in a foreign market at a very low price and the remaining
output at a high price in the home market Haberler defines dumping as: “The sale
of goods abroad at a price which is lower than the selling price of the same goods
at the same time and in the same circumstances at home, taking account of
differences in transport costs” Viner’s definition is simple.
According to him, “Dumping is price discrimination between two markets in
which the monopolist sells a portion of his produced product at a low price and the
remaining part at a high price in the domestic market.” Besides, Viner explains two
other types of dumping. One, reverse dumping in which the foreign price is higher
than the domestic price. This is done to turn out foreign competitors from the
domestic market. When the product is sold at a price lower than the cost of
production in the domestic market, it is called reverse dumping Two when there is
no consumption of the commodity in the domestic market and it is sold in two
different foreign market, out of which one market is charged a high price and the
other market a low price. But in practice, dumping means selling of the product at
a high price in the domestic market and a low price in the foreign market. We shall
explain price determination under dumping in this sense.
Types of Dumping:
1. Sporadic or Intermittent Dumping:
It is adopted under exceptional or unforeseen circumstances when the domestic
production of the commodity is more than the target or there are unsold stocks of
the commodity even after sales. In such a situation, the producer sells the unsold
stocks at a low price in the foreign market without reducing the domestic price.
This is possible only if the foreign demand for his commodity is elastic and the
producer is a monopolist in the domestic market. His aim may be to identify his
commodity in a new market or to establish himself in a foreign market to drive out
a competitor from a foreign market. In this type of dumping, the producer sells his
commodity in a foreign country at a price which covers his variable costs and some
current fixed costs m order to reduce his loss.
2. Persistent Dumping:
When a monopolist continuously sells a portion of his commodity at a high price in
the domestic market and the remaining output at a low price in the foreign market,
it is called persistent dumping. This is possible only if the domestic demand for
that commodity is less elastic and the foreign demand is highly elastic. When costs
fall continuously along with increasing production, the producer does not lower the
price of the product more in the domestic market because the home demand is less
elastic. However, he keeps a low price in the foreign market because the demand is
highly elastic there. Thus, he earns more profit by selling more quantity of the
commodity in the foreign market. As a result, the domestic consumers also benefit
from it because the price they are required to pay is less than in the absence of
dumping.
3. Predatory Dumping:
The predatory dumping is one in which a monopolist firm sells its commodity at a
very low price or at a loss in the foreign market in order to drive out some
competitors. But when the competition ends, it raises the price of the commodity m
the foreign market. Thus, the firm covers loss and if the demand in the foreign
market is less elastic, its profit may be more.
Objectives of Dumping:
1. To Find a Place in the Foreign Market:
A monopolist resorts to dumping in order to find a place or to continue himself in
the foreign market. Due to perfect competition in the foreign market he lowers the
price of his commodity in comparison to the other competitors so that the demand
for his commonly may increase. For this, he often sells his commodity by incurring
loss in the foreign market.
2. To Sell Surplus Commodity:
When there is excessive production of a monopolist’s commodity and he is not
able to sell in the domestic market, he wants to sell the surplus at a very low price
in the foreign market. But it happens occasionally.
3. Expansion of Industry:
A monopolist also resorts to dumping for the expansion of his industry. When he
expands it, he receives both internal and external economies which lead to the
application of the law of increasing returns. Consequently, the cost of production
of his commodity is reduced and by selling more quantity of his commodity at a
lower price in the foreign market, he earns larger profit.
4. New Trade Relations:
The monopolist practices dumping in order to develop new trade relations abroad.
For this, he sells his commodity at a low price in the foreign market, thereby
establishing new market relations with those countries. As a result, the monopolist
increases his production, lowers his costs and earns more profit.
Price Determination under Dumping:
Under dumping, the price is determined just like discriminating monopoly. The
only difference between the two is that under discriminating monopoly both
markets are domestic while under dumping one is a domestic market and the other
is a foreign market. In dumping, a monopolist sells his commodity at a high price
in the domestic market and at a low price in the foreign market.
a. Conditions:
Price determination under dumping is based on the following conditions or
assumptions:
1. The main aim of the monopolist is to maximise his profit. He, therefore,
produces that output at which his marginal revenue equals marginal cost. Since he
sells his commodity in the domestic market and the foreign market separately, he
adjusts the quantity such wise in each market that marginal revenues in both
markets are equal.
Given the marginal cost of producing the commodity, the most profitable
monopoly output will be determined at a point where the combined marginal
revenue of both the markets equals the marginal cost. In other words, dumping
profit = MRH + MRF = MC.
2. The elasticity’s of demand must be different in the two markets. The demand
should be less elastic in the domestic market and perfectly elastic in the foreign
market. As a result, the monopolist sells his commodity at a low price in the
foreign market and at a high price in the domestic market. Thus, the price and MR
are related to each other by this equation: MR = p (=AR) (1 – 1/E), where e refers
to the elasticity of demand.
3. The foreign market should be perfectly competitive and the domestic market is
monopolistic
4. The buyers in the domestic market cannot buy the cheap commodity from the
foreign market and bring it in the domestic market.
b. Explanation:
Given these conditions, price and output under dumping will be determined by the
equality of the total marginal revenue curve and the marginal cost curve of pro-
ducing the commodity. Figure 5 illustrates price-output determination under
dumping.

The foreign market demand curve faced by the monopolist is the horizontal line
PDF which is also the MR curve because the foreign market is assumed to be
perfectly elastic. The demand curve in the home market with a less elastic demand
for the product is the downward sloping curve D H and its corresponding marginal
revenue curve is MRH. The lateral summation of MR H and PDF curves leads to the
formation of TREDF as the combined marginal revenue curve.
In order to determine the quantity of the commodity produced by the monopolist,
we take the marginal cost curve MC. E is the equilibrium point where the MC
curve equals the combined marginal revenue curve TRED F. Thus OF output will be
produced for sale in the two markets. Since FE is the marginal cost, equilibrium in
the domestic market will be established at point R where the marginal cost FE
equals the MRH curve (FE = HR).
Now OH quantity will be sold at HM price in the home market and the remaining
quantity HF will be sold in the foreign market at OP (= FE) price. Thus the
monopolist sells more in the foreign market with the more elastic demand at a low
price and less in the home market with the less elastic demand at a high price. His
total profits are TREC.
Effects of Dumping:
Dumping affects both the importer and exporter countries in the following
ways:
1. Effects on Importing Country:
The effects of dumping on the country, in which a monopolist dumps his
commodity, depend on whether dumping is for a short period or a long period and
what are the nature of the product and the aim of dumping.
1. If a producer dumps his commodity abroad for a short period, then the industry
of the importing country is affected for a short while. Due to the low price of the
dumped commodity, the industry of that country has to incur a loss for some time
because less quantity of its commodity is sold.
2. Dumping is harmful for the importing country if it continues for a long period.
This is because it takes time for changing production in the importing country and
its domestic industry is not able to bear competition. But when cheap imports stop
or dumping does not exist, it becomes difficult to change the production again.
3. If the dumped commodity is a consumer good, the demand of the people in the
importing country will change for the cheap goods. When dumping stops, this
demand will reverse, thereby changing the tastes of the people which will be
harmful for the economy.
4. If the dumped commodities are cheap capital goods, they will lead to the setting
up of a now industry. But when the imports of such commodities stop, this industry
will also be shut down. Thus ultimately, the importing country will incur a loss.
5. If the monopolist dumps the commodity for removing his competitors from the
foreign market, the importing country gets the benefit of cheap commodity in the
beginning. But after competition ends and he sells the same commodity at a high
monopoly price, the importing country incurs a loss because now it has to pay a
high price.
6. If a tariff duty is imposed to force the dumper to equalise prices of the domestic
and imported commodity, it will not benefit the importing country.
7. But a lower fixed tariff duty benefits the importing country if the dumper
delivers the commodity at a lower price.
2. Effects on Exporting Country:
Dumping affects the exporting country in the following ways:
1. When domestic consumers have to buy the monopolistic commodity at a high
price through dumping, there is loss in their consumers’ surplus. But if a
monopolist produces more commodities in order to dump it in another country,
consumers benefit. This is because with more production of the commodity, the
marginal cost falls. As a result, the price of the commodity will be less than the
monopoly price without dumping.
But this lower price than the monopoly price depends upon the law of production
under which the industry is operating. If the industry is producing under the law of
diminishing returns, the price will not fall because costs will increase and so will
the price increase.
The consumers will be losers and the monopolist will profit. There will be no
change in price under fixed costs. It is only when costs fall under the law of
increasing returns that both the consumers and the monopolist will benefit from
dumping.
2. The exporting country also benefits from dumping when the monopolist
produces more commodity. Consequently, the demand for the required inputs such
as raw materials, etc. for the production of that commodity increases, thereby
expanding the means of employment in the country.
3. The exporting country earns foreign currency by selling its commodity in large
quantity in the foreign market through dumping. As a result, its balance of trade
improves.
Anti-Dumping Measures:
a. Tariff Duty:
To stop dumping, the importing country imposes tariff on the dumped commodity
consequently, the price of the importing commodity increases and the fear of
dumping ends. But it is necessary that the rate of duty on imports should be equal
to the difference between the domestic price of the commodity and the price of the
dumped commodity. Generally, the tariff duty is imposed more than this difference
to end dumping, but it is likely to have harmful effects on other imports.
b. Import Quota:
Import quota is another measure to stop dumping under which a commodity of a
specific volume or value is allowed to be imported into the country. For this
purpose, it includes the imposition of a duty along with fixing quota, and providing
a limited amount of foreign exchange to the importers.
c. Import Embargo:
Import embargo is an important retaliatory measure against dumping. According to
this, the imports of certain or all types of goods from the dumping country are
banned.
d. Voluntary Export Restraint:
To restrict dumping, developed countries enter into bilateral agreements with other
countries from which they fear dumping of commodities. These agreements ban
the export of specified commodities so that the exporting country may not dump its
commodities in other country. Such bilateral VER agreements exist between India
and EU countries in exporting Indian textiles.
Conclusion:
It is generally observed that anti-dumping measures explained above harm rather
than benefit the country adopting these measures. The producers of the country
never want that commodities should be imported from abroad. They, therefore,
pressurise the government to restrict the import of better and cheap imports by
calling them dumped commodities.
The reason for this is to misinterpret dumping. According to Article IV of GATT
1984, which now forms part of the World Trade Organisation (WTO), a country
can adopt anti-dumping measures only if the dumped imports “injure” the industry
of the country. A commodity is regarded as dumped which is exported to the other
country at a value lower than its normal value. Or it will also be regarded as
dumped if the export price of the commodity is less than its comparable price for
final consumption in the exporting county. Under these situations, the importing
country can impose anti-dumping duty, provided the margin of dumping is more
than 2% of the export price or is more than 7% of the dumped import.