ASSIGNMENT

SUBJECT:-ECONOMICS FOR MANAGERS

TOPIC:
Price discrimination: Case of Dumping

SUBMITTED BY:

SHUBHADIP BISWAS
SECTION-A
ROLL NO.-FT-10-948

SIVNANDAN VERMA
SECTION-A
ROLL NO.-FT-10-947
Price Discrimination
Discussions of firm pricing behavior often assume that a firm will
charge the same price to all consumers. In reality, we find
examples like theatres who charge different prices to students,
the general public, seniors, etc. - even though the cost of
supplying "entertainment" to each of these consumer types is the
same. This corresponds with a practice known as price
discrimination.

What is price discrimination? The standard discussion of price

discrimination centers on the following brief definition: "Price
discrimination is the sale (or purchase) of different units of a
good or service at price differentials not directly corresponding to
differences in supply cost." (Scherer and Ross, 1990)

How do firms conduct price discrimination? Price

discrimination is founded on a firm's ability to distinguish
amongst buyers, based on their varying demand characteristics
for a particular product. The more a firm is able to do so, the
more perfect the degree of price discrimination.
Three conditions must exist to enable a firm to profitably price
discriminate: (a) the firm must have market power, (b) the firm
must be able to distinguish among buyers on the basis of their
demand-related characteristics (e.g. demand elasticity or
reservation price), and (c) the firm must be able to constrain
resale between buyers with high and low reservation prices (or
demand elasticities).
There are three degrees of price discrimination (illustrated
below): (a) first degree (perfect), where firms charge each
consumer their reservation price for the good; (b) second
degree, where firms charge "blocks" of consumers their
reservation price for the good; and (c) third degree, where firms
divide consumers into two or more submarkets, each with its own
demand curve, and independently maximize profits in each
submarket.
What types of price discrimination are found in practice?
There are three main classes, each with differing intra-type
examples: personal discrimination, which is based on differences
among individual consumers; group discrimination, where
intergroup differences are the distinguishing factor; and product
discrimination, where different products are priced in a
discriminating manner.

In simple monopoly, where the monopolist charges a single price

from all buyers for reasons not associated with differences in
costs. At times, the monopolist is in a position to charge different
prices for the same product. This behavior of monopolist is
termed as price discrimination and this type of monopoly is
referred to as discriminatory monopoly. In the words of Joan
Robinson, the act of selling the same article, product under a
single control, at different prices to different buyers is known as
price discrimination". A monopolist resorts to price discrimination,
whenever it is possible and profitable to do so. Thus, price
discrimination is a special case of monopoly. It is different from
price differentiation, where the difference in price may be equal
to the difference in the cost.

Under price discrimination, the cost of production is the same. If

it differs, the difference in cost is less than the difference in prices
charged from different buyers. In the words , "price
discrimination is the sale of technically similar products at prices,
which are not proportional to marginal costs".
The product sold by the monopolist is essentially the same.
However, sometimes, there may be slight or illusory difference.
Different binding (hard bound or paperback) of the same book,
different location of seats in a theatre or cinema hall, different
seats in an aircraft or a train, different colors of the cars are
some examples.

The differences in prices charged from different buyers may be

based on demand differences or cost differences or both.
Important point is to identify different sectors of the market
having demand curves of different elasticity‘s. Higher price will be
charged in the market with more inelastic demand and lower
price would be there in the market with relatively elastic demand,
since the consumers have more or better substitutes here. The
price in the latter market can be raised only at the expense of
decline in sales.

Forms Of Price Discrimination

Price discrimination may assume several forms. Following are the
principal forms of price discrimination.
1. Personal Discrimination
2. Place Discrimination
3. Trade Discrimination
4. Time Discrimination
5. Product Discrimination

Price discrimination causes ethical concerns within the global

community because it causes many consumers to have to pay
more than what is considered fair for a product. In addition, this
practice harms competition among international
businesses. ―Price discrimination may become an ethical issue or
even be illegal when (1) the practice violates either country‘s
laws, (2) the market cannot be divided into segments, (3) the
cost of segmenting the market exceeds the extra revenue from
legal price discrimination, or (4) the practice results in extreme
customer dissatisfaction.‖

Dumping - A Special Case Of Price Discrimination

DOMESTIC FIRM
SELLING AT LOWER
PRICE IN HOME
MARKET

FORIGN FIRM SELLING AT

LOWER PRICE IN OTHER

COUNTRY
Dumping:- It is unethical, and in many countries, an illegal
practice. It is ―an informal name for the practice of selling a
product in a foreign country for less than either (a) the price in
the domestic country, or (b) the cost of making the product. It is
illegal in some countries to dump certain products into them,
because they want to protect their own industries from such
competition.‖ So why would a business want to sell their
products for less than they can demand domestically, or for even
less than the production cost? There are several reasons why a
company might chose to implement dumping as a strategic
move. For example, the product may have become obsolete in
the domestic market yet still have a demand in other nations. The
domestic market may not be sufficient to sustain adequate levels
of production so dumping internationally is implemented.
Dumping is also a way for a corporation to ―enter a market
quickly and capture a large market share.‖ ) Whatever the
strategy behind dumping may be, it is viewed as unethical if it
obstructs competition or harms the business and employees of a
competitor within a country. ―Anti-dumping suits, along with
safeguards and countervailing measures, are tools for protecting
domestic industries from surges of cheap foreign imports.
In imperfectly competitive markets, firms sometimes charge one
price when it exported but when sold in the domestic market at a
higher price. In reality one can surely say this to be imperfect
competition. The practice by which the producer charges its
customers different prices based upon the different market
demands is known as price discrimination. One can thus easily
observe that dumping involves the practice of price
discrimination. According to Krugman, dumping occurs if the
following two conditions are met:
1. The industry has to be perfectly competitive only if there is
an imperfect competition, and the prices are set by the firms
itself and not taking into account the market prices.
2. The markets must be segmented so that the domestic
residents cannot easily purchase goods intended for export.
To prevent this dumping by a firm in a foreign country the foreign
country generally imposes a duty on the firm, equal to the
difference between the actual and the 'fair' price of imports. In
the present scenario the 'fair' price is generally determined based
on estimates of foreign production costs. The very fact that price
discrimination when practiced by airlines and railways in case of
charging different prices to students and senior citizens is
promoted but when the same strategy is followed by a firm to
enter into a market and is willing to incur losses, anti-dumping
duties are imposed.

The firm can still practice price discrimination, if, it has a

monopoly in the domestic market, but faces perfect competition
in the international market for his product. Here, the monopolist
sells his product at a higher price in the home market and at a
very low price in the foreign market. This is called dumping, as
the firm virtually dumps his product at a very low price in the
foreign market, wherein it feces perfectly elastic demand curve.
The price in the foreign market may even be lower than the
average cost of production. The firm then suffers losses here.

However, the monopolist does not suffer an overall loss. By

exploiting the home market, it can raise price above the average
cost and earn monopoly profit, which might more than
compensate for the foreign market losses.

Fig. 4 illustrates how the price discrimination is possible by the

monopolist in spatially separated markets. In protected domestic
market, this monopolist faces downward sloping demand curve
ARD The corresponding marginal revenue curve MR D is also
downward sloping. However, die demand curve AR F of the
concerned firm in the foreign market is horizontal straight line at
the level of OPF price, as here; it is one among large number of
competitors. In the foreign market, its marginal revenue curve
MRF coincides with the demand curve ARF due to perfect
competition there. On account of perfect competition in the
foreign market, the firm has no freedom to determine price in the
international market. Rather, it is a price taker here. However,
the firm can fix the profit maximizing price in the domestic
market. Here, the price cannot fall below OPF level.
The price determination under dumping is slightly different from
the one explained earlier, where the firm enjoys monopoly power
in each sub-market. Under dumping, instead of taking just lateral
summation of the two marginal revenue curves,[we take the
composite curve BCE as the aggregate] marginal revenue (AMR)
curve. The firm will be in equilibrium at point 'E‘ where this curve
is intersected! by its given marginal cost curve MC from below.
The equilibrium output OQF determined by dropping perpendicular
on the X-axis is to be distributed between the home market and
the foreign market in such a way that marginal revenue in each
market is equal to each other and to the marginal cost EQ F It is
clear from Fig. 4 that 'C' is the point of equilibrium of the firm in
the home market, where marginal revenue CQ D is equal to
marginal cost EQF. Thus, OQD amount of total output is sold in the
home market.

Fig. 4: Price Determination under Dumping

It is clear from the ARD curve of the firm that RQD or OPD price
will be charged for OQD amount of output in the home market.
The remaining amount OQF ? OQD = QDQF of the total output will
be sold in the foreign market. The total output in the two markets
is OQD + QDQF = OQF. The profit maximizing equilibrium condition
of the firm can be written as MRD = MRF = AMR = MC. The total
profit of the firm is given by the shaded area shown in Fig. 4
between the aggregate marginal revenue curve BCE and the
combined marginal cost curve MC.

Even under dumping, the relationship between price and the price
elasticity of demand is clearly established. The concerned firm
sells more output at a lower price in the foreign market (which
has highest possible elasticity of demand) and less output at a
higher price in the domestic market (which has less elastic
demand).

Forms of Dumping
Persistent Dumping - Dumping resulting from international price
discrimination.
Predatory Dumping – it is the ‗temporary‘ sale of a commodity at
below cost or at a lower price abroad in order to drive foreign
producers out of business, after which prices are raised abroad to
take advantage of the newly acquired monopoly power.
For example, suppose there are two companies selling identical
products; company Y is a domestic firm and company X is
a foreign firm. Company X wants to drive company Y out of the
market, so it prices its product far below the cost of producing it.
Company Y must compete by lowering its prices, which eventually
causes the company to lose money and exit the market.
Sporadic Dumping – It is the ‗occasional‘ sale of the commodity
at below cost or at a lower price abroad than domestically in
order to unload an unforeseen and temporary surplus of a
commodity without having to reduce domestic prices.
 Reasons for Dumping
• Predatory Price (Predatory Dumping)
The practice of cutting prices in an attempt to drive a rival out of
business or create barriers to entry for potential new competitors.
• Price Discrimination/Strategic Dumping
If a firm has a monopoly in its home market but faces strong
competition in a foreign market, it will charge a higher price in
the home market.
• Cyclical Dumping
Selling at low price because of over capacity due to downturn in
demand.
• Market Expansion Dumping
Selling at lower price for export than domestically in order to gain
market share.
• State Trading Dumping
Selling at lower price in order to gain hard currency.

The nations dump products to:---

ELIMINATE COMPETITION
SECURE MONOPOLIES
INCREASE SHARE OF INTERNATIONAL EXPORT
Dumping: Factors
• Subsidies:
Subsidies (in the exporting country) can lead to aggressive
dumping, since goods can be sold profitably at a price that is
cheaper than the cost of manufacture.
• Banned Products:
History also sheds light on the numerous manufacturers that
have used dumping to sell off products that were banned in their
domestic market.

Effects
Dumping can harm the domestic industry by reducing its sales
volume and market shares, as well as its sales prices.
• Dumping results in the following:
– Hurts a country‘s domestic industry and producers.
– Impacts the sales volume.
– Hurts the market shares.
– Triggers decline in profitability.
– Leads to job losses.
– Cause material injury.
Examples
 Japan was accused of dumping steel, television sets, and
computer chips in the United States, and Europeans of
dumping cars, steel and other products.
 Most industrial nations (especially those of European union)
have tendency of persistently dumping surplus agricultural
commodities arising from their farm support programs.
 "Dumping" is the practice of American firms exporting goods
which have been declared dangerous or which have been
banned altogether from domestic markets . The practice is
typically undertaken by companies which have invested a
considerable amount of their resources into the product, and
who are trying to recover part of that investment.
 Dumping can take many forms. One example is of pajamas
containing the chemical Tris, which, according to study,
caused kidney cancer in children . In this instance, a number
of small companies who manufactured clothing treated with
the now-banned chemical faced mounting inventories and
severe financial losses. In order to absorb the losses, some
companies sold the pajamas to exporters who marketed the
goods overseas where Tris-treated garments were not
banned. The manufacturers suffered less severe losses than
if they had not sold to the exporters, the exporters made a
profit on the deal, and children overseas were exposed to
the carcinogen Tris.
 Dumping can assume more sinister forms, as well. Wheat
and barley in Iraq were treated with a US-banned fungicide
in 1972. As a result, 400 died and 5,000 became ill.
 Baby pacifiers (Teether) which have been implicated in
choking deaths have been shipped overseas.
 The moral question becomes more acute when considering
the use of the Dalkon Shield. This contraceptive device is
known to cause pelvic inflammation, blood poisoning,
 spontaneous abortions, tubal pregnancies and uterine
perforations . Some deaths are considered the direct result
of the contraceptive's use.
Despite its known risks, the device is used in a number of
American sponsored population control programs. The
Dalkon Shield puts women at these countries at increased
risk of illness and death. Yet a number of American and
overseas officials support the contraceptive's use. These
officials argue that withdrawing the contraceptive will result
in more pregnancies in societies which can ill afford
significant increases in population.

Anti Dumping
Anti dumping is a measure to rectify the situation arising out of
the dumping of goods and its trade distortive effect.
The purpose of anti dumping duty is to rectify the trade distortive
effect of dumping and re-establish fair trade. The use of anti
dumping measure as an instrument of fair competition is
permitted by the WTO.
So, anti dumping is an instrument for ensuring fair trade and is
not a measure of protection for the domestic industry.
If the domestic industry is able to establish that it is being injured
by the dumping, then antidumping duties are imposed on goods
imported from the dumpers' country at a percentage rate
calculated to counteract the dumping margin.
Advocates of free markets see "dumping" as beneficial for
consumers and believe that protectionism to prevent it would
have net negative consequences.
Investigation & Litigation
There are different ways of calculating whether a particular
product is being dumped heavily or only lightly. The agreement
narrows down the range of possible options. It provides three
methods to calculate a product‘s ―normal value‖.
The main one is based on the price in the exporter‘s domestic
market.
When this cannot be used, two alternatives are available — the
price charged by the exporter in another country,
Or a calculation based on the combination of the exporter‘s
production costs, other expenses and normal profit margins.
Anti-dumping investigations are to end immediately in cases
where the authorities determine that the margin of dumping is
insignificantly small (defined as less than 2% of the export price
of the product).
Other conditions are also set. For example, the investigations also
have to end if the volume of dumped imports is negligible i.e. if
the volume from one country is less than 3% of total imports of
that product.
Although investigations can proceed if several countries, each
supplying less than 3% of the imports, together account for 7%
or more of total imports.