Dumping:
Definition and Explanation:
Dumping
is a special case of price discrimination.
Dumping is a situation in which the price, a 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.
Reasons:
A firm
may resort to dumping for a number of reasons which in brief are as under:
(1)
Price discrimination: The first reason of dumping is price discrimination.
If a firm has monopoly of a good in home market, but faces strong competition in
foreign market, the firm will naturally charge a higher price in home market and
lower competitive price in foreign market.
(2)
Predatory pricing: The second major reason is predatory pricing. It is the
practice of cutting prices of goods in an attempt to derive rival firms out of
business.
(3)
Surplus stock: A firm may resort to dumping to dispose off surplus stock.
(4)
Economies of large scale production: The big firms where huge fixed capital
is required for producing the goods may resort to dumping to avail of the
economies of large scale production.
Dumping
is illegal under international trade agreements of World Trade Organization (WTO).
A nation can impose anti dumping duties only on production that are being
dumped.
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