Economics 340: International Economics
Andrew T. Hill
Dumping
& Textbook Readings: Pugel & Lindert, International Economics, 11th Edition, pp. 184-189.
Dumping, a form of international price discrimination, occurs when foreign buyers are charged
lower prices than domestic buyers for an identical product, after allowing for transportation
costs and tariff duties.
✭ Recall from ECON151: Price discrimination
In ECON151, we studied the implications of a monopoly. If there is one firm in the
market, it will exhibit monopoly power and be a price setter. Since the monopoly is a
price setter, it will be able to extract a profit from the consumers of the good that it
produces. A monopoly may be able to price discriminate.
Example: The Main Street Apple Cart
In order for a firm to be able to price discriminate, it must be a monopoly (be a price
setter), be able to segregate the market, and prevent resale.
A graph:
Sporadic dumping occurs when a firm disposes of excess inventories on foreign markets by
selling abroad at lower prices than at home. This form of dumping is temporary and often
overlooked by most governments.
Predatory dumping occurs when a producer temporarily reduces the prices of its goods abroad
in order to drive foreign competitors out business. This form of dumping is usually very
difficulty to prove and empirical tests have shown that it is not very common.
54
Persistent dumping occurs when dumping goes on indefinitely in an effort to maximize
profits. This type of dumping is of greatest concern to most governments.
✭ Recall from ECON151: Own-price elasticity of demand and total revenue
In ECON151 we studied own-price elasticity of demand. Let’s fill in the following table
relating elasticity with total revenue.
Table 22: Own-Price Elasticity of Demand and Total Revenue
Eii ? 1
If P rises
Elastic
____________
____________
Inelastic
____________
____________
Unit Elastic
____________
____________
◆ Dumping Problem
Suppose a firm is a monopoly in the home market and sells in a perfectly competitive
market abroad. Then, the demand curve that the firm faces at home will be more
inelastic than the one it faces in the international market. For this reason, the firm would
like to charge a higher price and sell less in the domestic market at a lower price and sell
more in the foreign market. Such a practice would be predatory dumping since the firm
would be price discriminating, dumping the excess quantity on the less elastic market,
and earning a higher profit as a result. We can show this graphically by comparing the
way that the firm will profit maximize when it dumps (international price
discrimination) and when it does not dump (nondiscrimination).
No Dumping (Nondiscriminating) Case
Price
Price
Price
500
500
400
500
200
200
700
0
25
35
Home Market
0
300
200
10
20
30
Foreign Market
0
15
30
45
60
Total Market
Total profit =
What is the procedure we used here?
55
Dumping Case (Discriminating) Case
Price
Price
Price
500
500
400
500
200
200
700
0
25
35
Home Market
0
300
200
10
20
30
Foreign Market
0
15
30
45
60
Total Market
Total profit =
What is the procedure we used here?
In order for international price discrimination (and therefore persistent dumping) to be
successful,
M
1.
The submarket demand conditions must differ.
2.
The firm must be able to separate the two markets and prevent resale.
Be absolutely certain that you know the procedure for finding the level of output,
price, and profit in each market. DO NOT simply memorize the graphical
outcome because the result can be disastrous when it comes to a quiz or an exam!
◆ Group Problem
The figures below can be used to show the practice of international dumping by a firm.
Given the marginal revenue and demand curves in the home market, the foreign market,
and the total market, determine the profit maximizing level of output in each market, the
price charged in each market, the profit in each market, the average total cost of production, and the total profit accruing to the firm. Do this for the dumping and the nondumping cases.
56
No Dumping (Nondiscriminating) Case
Price
Price
Price
5
5
4
5
2
2
7
0
5
7
0
3
2
2
4
6
Home Market
Foreign Market
Q = ________
Q = ________
P = ________
P = ________
Π = ________
Π = ________
0
3
6
9
12
Total Market
ATC = ________
Dumping Case (Discriminating) Case
Price
Price
Price
5
5
4
5
2
2
7
0
5
7
0
3
2
2
4
6
Home Market
Foreign Market
Q = ________
Q = ________
P = ________
P = ________
Π = ________
Π = ________
0
3
6
9
12
Total Market
ATC = ________
✍ Predicated Essays
1.
Show using the three graphs we used in class how price and output in each market will
differ if a producer sells: a) under international price discrimination (i.e., dumping) and
b) under nondiscrimination. (I am providing two sets of graphs for this purpose. Give a
concise explanation of why you do what you do in the graphs to determine the output
level and the price. I also suggest that you include a discussion of how profit differs
between dumping and nondumping and why a firm would choose dumping over
nondumping if it could get away with it.) Carefully label or indicate the price and output which results in each market. Hatch only the profit rectangle in each market.
57