ASSIGNMENTSUBJECT:-ECONOMICS FOR MANAGERSTOPIC: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 DiscriminationDiscussions of firm pricing behavior often assume that a firm willcharge the same price to all consumers. In reality, we findexamples like theatres who charge different prices to students,the general public, seniors, etc. - even though the cost ofsupplying "entertainment" to each of these consumer types is thesame. This corresponds with a practice known as pricediscrimination.What is price discrimination? The standard discussion of pricediscrimination centers on the following brief definition: "Pricediscrimination is the sale (or purchase) of different units of agood or service at price differentials not directly corresponding todifferences in supply cost." (Scherer and Ross, 1990)How do firms conduct price discrimination? Pricediscrimination is founded on a firms ability to distinguishamongst buyers, based on their varying demand characteristicsfor a particular product. The more a firm is able to do so, themore perfect the degree of price discrimination.Three conditions must exist to enable a firm to profitably pricediscriminate: (a) the firm must have market power, (b) the firmmust be able to distinguish among buyers on the basis of theirdemand-related characteristics (e.g. demand elasticity orreservation price), and (c) the firm must be able to constrainresale between buyers with high and low reservation prices (ordemand elasticities).There are three degrees of price discrimination (illustratedbelow): (a) first degree (perfect), where firms charge eachconsumer their reservation price for the good; (b) seconddegree, where firms charge "blocks" of consumers theirreservation price for the good; and (c) third degree, where firmsdivide consumers into two or more submarkets, each with its owndemand curve, and independently maximize profits in eachsubmarket.
What types of price discrimination are found in practice?There are three main classes, each with differing intra-typeexamples: personal discrimination, which is based on differencesamong individual consumers; group discrimination, whereintergroup differences are the distinguishing factor; and productdiscrimination, where different products are priced in adiscriminating manner.In simple monopoly, where the monopolist charges a single pricefrom all buyers for reasons not associated with differences incosts. At times, the monopolist is in a position to charge differentprices for the same product. This behavior of monopolist istermed as price discrimination and this type of monopoly isreferred to as discriminatory monopoly. In the words of JoanRobinson, the act of selling the same article, product under asingle control, at different prices to different buyers is known asprice discrimination". A monopolist resorts to price discrimination,whenever it is possible and profitable to do so. Thus, pricediscrimination is a special case of monopoly. It is different fromprice differentiation, where the difference in price may be equalto the difference in the cost.Under price discrimination, the cost of production is the same. Ifit differs, the difference in cost is less than the difference in pricescharged from different buyers. In the words , "pricediscrimination 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, differentseats in an aircraft or a train, different colors of the cars aresome examples.The differences in prices charged from different buyers may bebased on demand differences or cost differences or both.Important point is to identify different sectors of the markethaving demand curves of different elasticity‘s. Higher price will becharged in the market with more inelastic demand and lowerprice would be there in the market with relatively elastic demand,since the consumers have more or better substitutes here. Theprice in the latter market can be raised only at the expense ofdecline in sales.Forms Of Price DiscriminationPrice discrimination may assume several forms. Following are theprincipal forms of price discrimination.1. Personal Discrimination2. Place Discrimination3. Trade Discrimination4. Time Discrimination5. Product DiscriminationPrice discrimination causes ethical concerns within the globalcommunity because it causes many consumers to have to paymore than what is considered fair for a product. In addition, thispractice harms competition among internationalbusinesses. ―Price discrimination may become an ethical issue oreven be illegal when (1) the practice violates either country‘slaws, (2) the market cannot be divided into segments, (3) the
cost of segmenting the market exceeds the extra revenue fromlegal price discrimination, or (4) the practice results in extremecustomer 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 illegalpractice. It is ―an informal name for the practice of selling aproduct in a foreign country for less than either (a) the price inthe domestic country, or (b) the cost of making the product. It isillegal in some countries to dump certain products into them,because they want to protect their own industries from suchcompetition.‖ So why would a business want to sell theirproducts for less than they can demand domestically, or for evenless than the production cost? There are several reasons why acompany might chose to implement dumping as a strategicmove. For example, the product may have become obsolete inthe domestic market yet still have a demand in other nations. Thedomestic market may not be sufficient to sustain adequate levelsof production so dumping internationally is implemented.Dumping is also a way for a corporation to ―enter a marketquickly and capture a large market share.‖ ) Whatever thestrategy behind dumping may be, it is viewed as unethical if itobstructs competition or harms the business and employees of acompetitor within a country. ―Anti-dumping suits, along withsafeguards and countervailing measures, are tools for protectingdomestic industries from surges of cheap foreign imports.In imperfectly competitive markets, firms sometimes charge oneprice when it exported but when sold in the domestic market at ahigher price. In reality one can surely say this to be imperfectcompetition. The practice by which the producer charges itscustomers different prices based upon the different marketdemands is known as price discrimination. One can thus easilyobserve that dumping involves the practice of pricediscrimination. According to Krugman, dumping occurs if thefollowing 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 foreigncountry generally imposes a duty on the firm, equal to thedifference between the actual and the fair price of imports. In
the present scenario the fair price is generally determined basedon estimates of foreign production costs. The very fact that pricediscrimination when practiced by airlines and railways in case ofcharging different prices to students and senior citizens ispromoted but when the same strategy is followed by a firm toenter into a market and is willing to incur losses, anti-dumpingduties are imposed.The firm can still practice price discrimination, if, it has amonopoly in the domestic market, but faces perfect competitionin the international market for his product. Here, the monopolistsells his product at a higher price in the home market and at avery low price in the foreign market. This is called dumping, asthe firm virtually dumps his product at a very low price in theforeign market, wherein it feces perfectly elastic demand curve.The price in the foreign market may even be lower than theaverage cost of production. The firm then suffers losses here.However, the monopolist does not suffer an overall loss. Byexploiting the home market, it can raise price above the averagecost and earn monopoly profit, which might more thancompensate for the foreign market losses.Fig. 4 illustrates how the price discrimination is possible by themonopolist in spatially separated markets. In protected domesticmarket, this monopolist faces downward sloping demand curveARD The corresponding marginal revenue curve MR D is alsodownward sloping. However, die demand curve AR F of theconcerned firm in the foreign market is horizontal straight line atthe level of OPF price, as here; it is one among large number ofcompetitors. In the foreign market, its marginal revenue curveMRF coincides with the demand curve ARF due to perfectcompetition there. On account of perfect competition in theforeign market, the firm has no freedom to determine price in theinternational market. Rather, it is a price taker here. However,the firm can fix the profit maximizing price in the domesticmarket. Here, the price cannot fall below OPF level.
The price determination under dumping is slightly different fromthe one explained earlier, where the firm enjoys monopoly powerin each sub-market. Under dumping, instead of taking just lateralsummation of the two marginal revenue curves,[we take thecomposite curve BCE as the aggregate] marginal revenue (AMR)curve. The firm will be in equilibrium at point E‘ where this curveis intersected! by its given marginal cost curve MC from below.The equilibrium output OQF determined by dropping perpendicularon the X-axis is to be distributed between the home market andthe foreign market in such a way that marginal revenue in eachmarket is equal to each other and to the marginal cost EQ F It isclear from Fig. 4 that C is the point of equilibrium of the firm inthe home market, where marginal revenue CQ D is equal tomarginal cost EQF. Thus, OQD amount of total output is sold in thehome market.Fig. 4: Price Determination under DumpingIt is clear from the ARD curve of the firm that RQD or OPD pricewill be charged for OQD amount of output in the home market.The remaining amount OQF ? OQD = QDQF of the total output willbe sold in the foreign market. The total output in the two marketsis OQD + QDQF = OQF. The profit maximizing equilibrium conditionof the firm can be written as MRD = MRF = AMR = MC. The totalprofit of the firm is given by the shaded area shown in Fig. 4
between the aggregate marginal revenue curve BCE and thecombined marginal cost curve MC.Even under dumping, the relationship between price and the priceelasticity of demand is clearly established. The concerned firmsells more output at a lower price in the foreign market (whichhas highest possible elasticity of demand) and less output at ahigher price in the domestic market (which has less elasticdemand).Forms of DumpingPersistent Dumping - Dumping resulting from international pricediscrimination.Predatory Dumping – it is the ‗temporary‘ sale of a commodity atbelow cost or at a lower price abroad in order to drive foreignproducers out of business, after which prices are raised abroad totake advantage of the newly acquired monopoly power.For example, suppose there are two companies selling identicalproducts; company Y is a domestic firm and company X isa foreign firm. Company X wants to drive company Y out of themarket, so it prices its product far below the cost of producing it.Company Y must compete by lowering its prices, which eventuallycauses the company to lose money and exit the market.Sporadic Dumping – It is the ‗occasional‘ sale of the commodityat below cost or at a lower price abroad than domestically inorder to unload an unforeseen and temporary surplus of acommodity 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 ofbusiness or create barriers to entry for potential new competitors. • Price Discrimination/Strategic DumpingIf a firm has a monopoly in its home market but faces strongcompetition in a foreign market, it will charge a higher price inthe home market. • Cyclical DumpingSelling at low price because of over capacity due to downturn indemand. • Market Expansion DumpingSelling at lower price for export than domestically in order to gainmarket share. • State Trading DumpingSelling 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 aggressivedumping, since goods can be sold profitably at a price that ischeaper than the cost of manufacture. • Banned Products:History also sheds light on the numerous manufacturers thathave used dumping to sell off products that were banned in theirdomestic market.EffectsDumping can harm the domestic industry by reducing its salesvolume 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 contraceptives 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 contraceptives use. These officials argue that withdrawing the contraceptive will result in more pregnancies in societies which can ill afford significant increases in population.Anti DumpingAnti dumping is a measure to rectify the situation arising out ofthe dumping of goods and its trade distortive effect.The purpose of anti dumping duty is to rectify the trade distortiveeffect of dumping and re-establish fair trade. The use of antidumping measure as an instrument of fair competition ispermitted by the WTO.So, anti dumping is an instrument for ensuring fair trade and isnot a measure of protection for the domestic industry.If the domestic industry is able to establish that it is being injuredby the dumping, then antidumping duties are imposed on goodsimported from the dumpers country at a percentage ratecalculated to counteract the dumping margin.Advocates of free markets see "dumping" as beneficial forconsumers and believe that protectionism to prevent it wouldhave net negative consequences.
Investigation & LitigationThere are different ways of calculating whether a particularproduct is being dumped heavily or only lightly. The agreementnarrows down the range of possible options. It provides threemethods to calculate a product‘s ―normal value‖.The main one is based on the price in the exporter‘s domesticmarket.When this cannot be used, two alternatives are available — theprice charged by the exporter in another country,Or a calculation based on the combination of the exporter‘sproduction costs, other expenses and normal profit margins.Anti-dumping investigations are to end immediately in caseswhere the authorities determine that the margin of dumping isinsignificantly small (defined as less than 2% of the export priceof the product).Other conditions are also set. For example, the investigations alsohave to end if the volume of dumped imports is negligible i.e. ifthe volume from one country is less than 3% of total imports ofthat product.Although investigations can proceed if several countries, eachsupplying less than 3% of the imports, together account for 7%or more of total imports.