Dumping is an informal name for the practice of selling a product in a foreign country for less than either
- The price in the domestic country, or
- The cost of making the product.
Dumping is a special case of price discrimination. Dumping is a situation in which the price, firm charges for its goods in a foreign market is lower than either the price it charges in its home market or the production cost. Dumping thus is the sale of surplus output of a firm on foreign markets at below cost price. Dumping also occurs when a firm sells its products at a higher price in the home market and at a lower price in the foreign market.
It is illegal in some countries to dump certain products into them, because they want to protect their own industries from such competition. Dumping is legal under GATT (now WTO) rule sunless its injurious effect on the importing country’s producers can be established. If injury is established, GATT rules allow imposition of anti-dumping duty equal to the difference between the exporter’s home-market price and the importer’s FOB price.
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.