ADVERTISEMENTS:
In this article we will discuss about the conditions, degrees and techniques of price discrimination under monopoly.
Answer 1. Price Discrimination in Monopoly:
Price discrimination may be (a) personal, (b) local, or (c) according to trade or use:
(a) Personal:
ADVERTISEMENTS:
It is personal when different prices are charged for different persons.
(b) Local:
It is local when the price varies according to locality.
(c) According to Trade or Use:
ADVERTISEMENTS:
It is according to trade or use when different prices are charged for different uses to which the commodity is put, for example, electricity is supplied at cheaper rates for domestic than for commercial purposes.
Some monopolists used product differentiation for price discrimination by means of special labels, wrappers, packing, etc. For example, the perfume manufacturers discriminate prices of the same fragrance by packing it with different labels or brands.
Conditions of Price-Discrimination:
There are three main types of situation:
(a) When consumers have certain preferences or prejudices. Certain consumers usually have the irrational feeling that they are paying higher prices for a good because it is of a better quality, although actually it may be of the same quality. Sometimes, the price differences may be so small that consumers do not consider it worthwhile to bother about such differences.
ADVERTISEMENTS:
(b) When the nature of the good is such as makes it possible for the monopolist to charge different prices. This happens particularly when the good in question is a direct service.
(c) When consumers are separated by distance or tariff barriers. A good may be sold in one town for Rs.1 and in another town for Rs.2. Similarly, the monopolist can charge higher prices in a city with greater distance or a country levying heavy import duty.
Conditions Making Price Discrimination Possible and Profitable:
The following conditions are essential to make price discrimination possible and profitable:
ADVERTISEMENTS:
(a) The elasticity’s of demand in different markets must be different. The market is divided into sub-markets. The sub-market will be arranged in ascending order of their elasticity’s, the higher price being charged in the least elastic market and vice versa.
(b) The costs incurred in dividing the market into sub-markets and keeping them separate should not be so large as to neutralize the difference in demand elasticity’s.
(c) There should be complete agreement among the sellers otherwise the competitors will gain by selling in the dear market.
(d) When goods are sold on special orders because then the purchaser cannot know what is being charged from others.
Price Determination under Price Discrimination:
ADVERTISEMENTS:
(i) First of all, the monopolist divides his total market into sub-markets.
In the following diagrams, the monopolist has divided his total market into two sub-markets, i.e., A and B:
(ii) The monopolist has now to decide at what level of output he should produce. To achieve maximum profit, hence, he will be in equilibrium at output at which MR=MC and MC curve cuts the MR curve from below. In the above diagram (c) it is shown that the equilibrium of the discriminating monopolist is established at output OM at which MC cuts CMR.
The output OM is distributed between two markets in such a way that marginal revenue in each is equal to ME. Therefore, he will sell output OM1 in Market A, because only at this output marginal revenue MR’ in Market A is equal to ME (M1E’ = ME).
The same condition is applied in Market B where MR” is equal to ME (M2E” = ME). In the above diagram, it is also shown that in Market B in which elasticity of demand is greater, the price charged is lower than that in Market B where the elasticity of demand is less.
Answer 2. Discriminating Monopoly:
Price discrimination exists when the same product is sold at different prices to different buyers. The cost of production is either the same or it differs but not as much as the difference in the charged price. The product is basically same, it may have slight difference. (For example, different binding of same book; different location of seats in a theatre; different seats in an aircraft or a train, etc.).
Here, we will concentrate on the typical case of an identical product, produced at the same cost, which is sold at different prices, depending on the preference of the buyers, income, location and the ease of availability of substitutes. These factors give rise to demand curves with different elasticities in the various sectors of the market of a firm. It is also common to charge different prices for the same product at different time periods.
The necessary conditions, which must be fulfilled for the implementation of price discrimination are the following:
(i) The market must be divided into submarkets with different price elasticities.
(ii) There must be effective separations of the submarkets, so that no reselling can take place from a low-price market to a high price market.
These conditions show why price discrimination is easier to apply with commodities like electricity, and services (Like services of a doctor, etc.), which are consumed by buyer and cannot be resold.
Degrees of Price Discrimination:
(i) Discrimination of First Degree:
In first degree, price discrimination the monopolist charge different prices for every unit of commodity. It means he charges the price accordingly, to extract entire amount of consumers surplus. Mrs. Joan Robinson refers to this kind of discrimination as Perfect Discrimination.
(ii) Second Degree Price Discrimination:
In second degree, price discrimination the monopolist charges different prices for a specific quantity or block of output. It means monopolist will sell one block of product at one price and another block at lower price. Second degree price discrimination is more common than first degree price discrimination.
(iii) Third Degree Price Discrimination:
In third degree price discrimination the price charged by monopolist is different in different market of same commodity. The division of whole market into the two or more than two submarkets is essential for third degree price discrimination. The third degree price discrimination is most common in practice.
Technique of Price Discrimination:
The reason for a monopolist to apply price discrimination is to obtain an increase in the total revenue and his profits.
We will start from the simplest case of a monopolist who sells his product at two different markets. It is assumed that the monopolist will sell this product in two segregated markets. Each of them having a demand curve with different elasticities (Fig. 9.6).
Let us assume there are two markets A and B. In the market A, demand for the product is less elastic while in market B, it is more elastic. This process has been explained in the fig. 9. AR1 and MR1 are average and marginal revenue curves of market A. AR2 and MR2 are the average and margined revenue curves of market B.
CMR is the combined marginal revenue (CMR) of market A and B. It is derived by lateral summation of MR curves of market A and B. It has a kink ‘K’ due to differences in elasticities of demand of both markets. MC is the marginal cost curve of monopolist.
The condition of equilibrium of discriminating monopolist is:
MC = CMR = MR1 = MR2.
E is the equilibrium point where MC curve cuts combined marginal revenue (CMR) curve. At that Point (i.e. E) a horizontal straight line parallel to the X-axis is drawn to Figs. 9.6 (a) and 9.6 (b). At points B1 and A1, MR1 and MR2 becomes equal to MC.
By dropping perpendicular from point B1 and A1 connecting the X-axis and the respective demand curves, the prices in the two markets are found out:
The price in the first market A is higher than the price in the market B. We do not calculate any price in Fig. 9.6 (c) as there is no aggregate price. Thus, in the technique of price discrimination the prices should be determined in such a way that MR in the different markets is equal to MC.
Dumping — A Special Case of Discrimination:
Dumping means charging a higher price in the domestic market and lower price in the foreign market for the same product. For dumping, the total market for the product is divided between domestic and foreign markets. The necessary condition for dumping is that in the domestic market the demand for the product is less elastic and more elastic in the foreign market. The process has been explained in the Fig. 9.7.
In the Figure, ARd and MRd are the average and marginal revenue curves for the domestic market. ARF and MRF are the average and marginal revenue curve for the foreign market. ARd and MRd are downward sloping average revenue and marginal revenue curves in the domestic market.
ARF and MRF are average revenue and marginal revenue curves in the foreign market and are parallel to X axis. Reason being, in the former case producer has a monopoly and in the latter case he faces perfect competition like situation in the foreign market. Aggregate marginal revenue curve (ARD) is obtained by adding the marginal revenue curves of domestic and foreign market. MC curve represents marginal cost curve of monopolist total output. The marginal cost curve cuts combine marginal revenue curve (ARD) at point E.
0Q is the equilibrium output. Now the total output is distributed between domestic and foreign market in such a way that marginal revenue of both markets should not only be equal to each other but equal to its marginal cost also. It is vivid from the Fig., when amount 0M is sold in the domestic market, marginal revenue MR is equal to marginal cost.
Thus, out of total output 0Q, 0M will be sold in the domestic market. In the domestic market, OP1 price will be charged. MQ output will be sold in the foreign market at 0P price. Thus, monopolist will maximise his profit by charging higher price in the domestic market and lower price in the foreign market.
Answer 3. Price Discrimination under Monopoly:
Price discrimination exists when the same product is sold at different prices to different buyers. The cost of production is either the same, or it differs but not as much as the difference in the charged prices. The product is basically the same, but it may have slight differences (for example, different binding of the same book; different location of seats in a theatre; different seats in an aircraft or a train).
The identical product, produced at the same cost is sold at different prices, depending on the preference of the buyers, their income, their location and the ease of availability of substitutes. These factors give rise to demand curves with different elasticity in the various sectors of the market of a firm.
It is also common to charge different prices for the same product at different time periods. For example, a new product is often sold at a high price, accessible only to the rich, while subsequently it is sold at lower prices that can be afforded by lower- income consumers.
The following are the necessary conditions that must be fulfilled for the implementation of price-discrimination:
1. The market must be divided into sub-markets with different price elasticity.
2. There must be effective separation of the sub-markets, so that no reselling can take place from a low-price market to a high- price market. This condition shows why price discrimination is easier to apply with commodities like electricity or gas, and services like services of a doctor, transport, a show, which are ‘consumed’ by the buyer and cannot be resold.
The reason for a monopolist (or any other firm) to apply price discrimination is to obtain an increase in his total revenue and his profits. By selling the quantity defined by the equation of his MC and his MR at different prices the monopolist realizes higher total revenue and hence higher profits as compared with the revenues he would receive by charging a uniform price.
Price Discrimination by Degrees:
First Degree Discrimination:
The simplest kind of discrimination of the first degree is one where, for some reason, consumers buy only one unit each from the firm. Knowing exactly how willing they are, the firm charges each one a price so high that the consumers almost, but not quite, refuse to pay the prices. If all of the consumers have different tastes, the firm has a different price for each one. The lowest price is determined by costs.
When consumers buy more than one unit of the firm’s product, they are willing to buy more units at lower prices. The firm must then adjust the units of sale. With first -degree price discrimination, the firm extracts the consumer’s entire surplus. The firm succeeds in getting all the area under the demand curve as revenue. Each consumer pays a price equal to the marginal utility of that unit for each unit consumed.
Discrimination of the first degree is the limiting, or extreme case. Obviously, it could occur only rarely, where a firm has only a few buyers and is shrewd enough to know the maximum prices they will pay. Doctors sometimes charge different fees C according to the incomes of their patients. Universities may approach first-degree price discrimination by charging a high tuition.
Second Degree Discrimination:
In discrimination of the second degree, the firm captures parts of buyer’s consumers’ surpluses, but not all of them. The schedules of rates typically charged by public utilities can be regarded as a form of second-degree discrimination. The price varies according to the number of units purchased by a consumer.
Second- degree price discrimination is necessarily practiced in markets where there are many buyers, sometimes hundreds or thousands of them. The same rate or price schedule must be offered to all buyers. Because tastes and incomes differ, the firm can seize only a small part of the consumer’s surplus of those buyers whose desires for the service are stronger and whose incomes are higher. Second -degree discrimination, furthermore, is limited to services sold in blocks of small units- cubic feet of gas, kilowatt of electricity, minutes of telephoning- that can easily be metered, recorded, and billed.
Third Degree Discrimination:
Third-degree price discrimination means that the firm divides customers into two or more classes or groups, charging a different price to each class of customers.
Public utility companies practice price discrimination of the third degree by grouping their customers into separate markets, such as residential, commercial and industrial. Each market is further subdivided into sub-markets, such as different times of the day and different uses of the service. Prices differ from one sub-market to another and, besides, second-degree discrimination is practiced within each sub-market.
Segmenting the market is a logical extension of product differentiation.
The objective of price discrimination is to secure maximum profits by adjusting the price and the output in each distinct sub-market according to the demand conditions. Assuming constant cost conditions in each market, the monopolist has to decide how much total output is to be produced and its distribution in each market and also what prices should be charged in different markets.
For analytical simplicity let us assume that the monopolist is able to divide the market for his product into two sub-markets A, and B whose demand curves are AR1 and AR2 respectively with different price elasticity of demand. Figure 4.12 depicts the marginal revenue curves corresponding to average revenue curves are given by MR1 and MR2 respectively. AAR & AMR are the aggregate average revenue and marginal revenue curves. Given the marginal cost curve MC for the whole output, the monopolist attains equilibrium at point E where the MC cuts the AMR from below.
At equilibrium, the monopolist produces and sells total output OQ that he allocated between two markets in such a way that the marginal revenue in each market is equal to the marginal cost of the entire output. In order to locate the equilibrium price and output levels in the two sub-markets A and B, a horizontal line is drawn from the equilibrium point ‘E’ that intersects MR1 and MR2 at points ‘E1’ and ‘E2’. In market A the monopolist charges P1 price and sells OQ1, while in market B he charges P2 price and sells OQ2 output. If we carefully look at the figure we can infer that the monopolist charges a higher price and sells lower output in a market with relatively inelastic demand curve, while in a relatively elastic demand curve he charges a lower price and sells a large output.
Answer 4. Price Discrimination under Monopoly:
Price discrimination is only possible when the following preconditions are fulfilled:
(1) Single Seller or Producer of a Commodity:
Price discrimination is only possible under the monopoly market structure where there is a single seller or producer of a commodity or service. In other types of market structure it is not possible.
(2) Two Separate Markets:
Price discrimination presupposes that there should be two separate markets in which such a product or commodity is being sold. They should not be adjacent to each other.
(3) Different Elasticity of Demand:
Price discrimination presupposes that the elasticity of demand for the product should be different in both the markets. The monopoly firm will then be able to fix a higher price in the market in which the elasticity of demand is inelastic and fix a lower price in the market having elasticity of demand more elastic.
(4) Nature of the Product:
The nature of commodity or service should be such that it may not be re-sold otherwise price discrimination will not be possible. Professionals charge different prices from different customers for their services. For example, doctors and lawyers are in this category of price discrimination. A poor patient cannot transfer the services rendered to him by a doctor to a rich patient.
(5) Laziness or Ignorance of Buyers:
When buyers are lazy and they do not know the market conditions then the monopolist will charge different prices for his product or service from different buyers. Sometimes customers are lazy and they do not bother about the slight difference in the price of a product or service.
(6) Supply or Sale on Order:
Price discrimination is also possible only when a single seller or producer of a product supplies or sells his product on order.
(7) Legal Acceptance:
When a monopoly firm has legal sanction from the government to sell its product at different prices then the price discrimination is possible. For example, RSEB has legal sanction from the government to charge different prices for the use of electricity in agricultural sector and industrial sector.
(8) Varying Preferences and Habits of Consumers:
Price discrimination is also possible when consumers have different preferences and habits for the consumption of a product or service. The product can be sold in different forms and different prices can be charged for the same product. For example, a book is supplied to library in hardbound while the same book is sold in paperback to the students. The different prices for the same book is charged by the publisher.
(9) Different Uses:
Price discrimination is also possible when the users of a service or product have different uses. For example, Indian Railways charge different freight rates for coal and silver.
(10) Tariff Charges:
Price discrimination is also possible due to tariff restrictions. We sell our product at higher prices in domestic market but the same product is sold at lower prices in international market because of tariff barriers.
(11) Different Transport Charges:
When there are different transport charges in different regions then the seller of a product or service will charge different prices from different buyers.
(12) Busy and Slack Working Hours:
Some services or products are used by the buyers or customers. Such service may have busy working hours as well as slack working hours. A monopolist can charge high prices and low prices as per the working hours from different customers. For example, telephone charges for STD or ISD will be high in busy working hours (day service) while it will be low in slack working hours (night service).
Price Discrimination:
Monopolist being a single operator in the market would aim at to maximize profit by way of getting maximum possible revenue from each buyer. This is not feasible if it charges a uniform price from all of them.
i. If the monopolist set a high price so as to maximize per unit profit, many buyers may not be in a position to buy it. Hence, demand for monopolist product will fall which, in turn, limit the gross profit of the monopolist.
ii. Similarly, if it set a low price to cater all the buyers, it may lose part of profit prospects. Since, he will not be charging every buyer to their respective willingness to pay.
iii. Thus, a uniform pricing policy may not be in the best interest of a monopolist. He will be better off by way of introducing price discrimination across buyers in such a way so as to maximize sales as well as profits.
The price discrimination is a strategy which involves charging different prices from different groups of consumer for homogenous product. For this purpose, monopolist may introduce product differentiation, actual or perceived. He introduces different variant of his product to cater different segment of demand.
Such a policy will help monopolist to maximize profit as well as to establish a market control. Technically speaking, the instrument of price discrimination enables a monopolist to convert entire or a part of consumer surplus into a producer’s surplus.
Such price discrimination is not possible in a competitive environment since the firms do not enjoy any market control.
For successful price discrimination, three essential conditions need to be satisfied.
They are:
1. Monopoly must have Effective Control over Total Supply:
It implies that the product of monopolist should not have close substitutes so that the monopolist controls effectively the market supply. In other words, there should be no meaningful option available to buyers for substituting the monopolist product.
2. More than Two Distinguishable Markets Completely Separate from Each Other:
Another requirement for price differentiation is that the monopolist should operate in more than one market. It means that there should be at least two completely distinguishable markets. It, however, does not mean that the markets should be at two different geographical locations. What is required is that the monopolist should be in a position to keep the two groups of buyers separate under all the conditions.
The condition of two separate markets is essential for preventing consumers of one market to buy from the other market. If this is not ensured, the consumers will re-sell the product in expensive market after purchasing from the cheaper one.
For this purpose, sometime, monopolist creates an artificial differentiation in the product variants so that they look different and can satisfy the expectations of different groups of buyers. This can be done by way of different brand names, different packaging, advertisement and, so on.
At times, market may be separated through geographical boundaries. For example, export market is separated from domestic markets because of geographical boundaries. A monopolist can easily charge a low price for exports vis-a-vis domestic sale.
3. Differences in Price Elasticity of Demand:
Another basic condition of price differentiation is that the price elasticity of demand of different markets must be different. In other words, one of the two markets must be more elastic than that of other. As such, the monopolist will charge a higher price from the market which is inelastic and a lower one from the elastic market.
Answer 5. Price Discrimination under Monopoly:
Price discrimination refers to the practice of selling the same commodity at different prices to different buyers. Under the situation of monopoly the producer usually restricts output and sells it at a higher price, thereby making maximum profit. If the monopolist charges different prices from different customers for the same commodity, the phenomenon is called price discrimination and the monopoly is termed as discriminating monopoly.
For instance, when a seller charges Rs. 500 for a commodity from a customer X and Rs. 350 for the same commodity from customer Y, the seller or the firm is practicing price discrimination. Joan Robinson explained the meaning of price discrimination as” the act of selling the same article produced under a single control at different prices to different buyers “. Prof Stigler defines Price discrimination as, “the sale of technically similar products at prices which are not proportional to marginal cost”.
Conditions for Price Discrimination to be Possible:
The conditions necessary for price discrimination to be possible are:
1. There should be imperfect competition present in the market. Price discrimination is not possible in the situation of perfect competition.
2. There should be two or more markets or groups which can be kept separated. If consumer of one market can resell the commodity in the market where the commodity is costlier, price discrimination will cease to exist.
3. The elasticity of demand in these two or more markets should be different.
Degrees of Price Discrimination:
The phenomenon of price discrimination has been distinguished into three different types by Prof. A.C. Pigou on the basis of the degree or extent of price discrimination.
(1) First Degree Price Discrimination:
Under price discrimination of the first degree, the producer exploits the consumer to the maximum possible extent by asking him to pay the maximum he is prepared to pay rather than go without the commodity. This type of price discrimination is called perfect discrimination. This is the ‘take-it-or-leave-it’ price discrimination. In the first degree price discrimination the monopolist is able to sell each separate unit of product at a different price.
(2) Second Degree Price Discrimination:
In the price discrimination of the second degree, the buyers are divided into different groups and from each group a different price is charged which is the lowest demand price of that group. In this process the seller thus divides his market into different groups’ of buyers in such a way that from each group of buyers the monopolist charges a different price which is equal to the price a marginal individual of that group is willing to pay.
(3) Third Degree Price Discrimination:
It is price discrimination of the third degree which has been commonly practiced by monopolist. In this case the markets are divided into many submarkets and in each submarket, the price charged is different. The price charged in the sub market will not be the minimum price. The price charged in the submarket depends on the output sold and the demand conditions of that sub market.
Pricing under Discriminating Monopoly:
We know that under simple monopoly the producer will charge the equilibrium price on the basis of total output and the marginal revenue and marginal cost will decide the equilibrium of the monopoly firm. But in order to discriminate prices the discriminating monopolist would divide the entire market into sub-markets on the basis of the elasticity of demand for the product. Only if the elasticity of demand is different, price discrimination will be profitable. After dividing the market, the monopolist has to decide the supply for each sub-market.
Here the decision of output for each sub-market depends on the equilibrium condition of each sub-market with the total cost condition and the revenue curves of the sub-market. The monopolist should decide two things on the basis of his/her cost and revenue curves.
1. How much the total output should be produced?
2. How the total output should be distributed between the sub-markets and what prices should be charged in each of his/her sub-market.
In order to make our analysis simple and uncomplicated, we shall take the situation where a monopolist divides his/her market, into sub-markets A and B and finds the AR curve different in these two.
The following figure 7.3 illustrates the revenue curves of the two sub-markets A and B and the aggregate situation in the entire market under his/her control:
In the sub-market A, AR1 is the demand curve or the average revenue curve of the sub-market. In sub-market B, AR2 is the demand curve or the average revenue curve of the market. Note that the elasticity of demand in these two sub-markets are different. In sub-market at the demand curve is inelastic in nature and in sub-market B the curve is elastic in nature. The two sub-markets respective marginal revenue curves are shown as MR1 and MR2 which lie below the average revenue curves of the respective sub-markets. In the figure, the total average revenue curve of the two sub-markets have been shown in the total market as AAR. Similarly, the aggregate of the two marginal revenue curves of the sub-markets has been shown as AMR.
According to the figure AR1 + AR2 = AAR. MR1 + MR2=AMR combined at various levels of output. Since the output is under single control the marginal cost curve is the aggregate number. MC in the total market shows the marginal cost for the entire production The level of production is determine at the point where MR=MC. In the total market the aggregate marginal revenue AMR curve cuts the MC curve at E and the total output is determined at OM for the total market. How much of OM goes to each of these markets is found out by drawing from E a line parallel to X-axis.
This line indicating marginal cost of output cuts the marginal revenue curves of the sub-markets A and B at E1 and E2 respectively. At the point E1 the marginal revenue of the sub-market A and the marginal cost of production are equal. So the equilibrium condition in sub-market a lies at E1 and therefore the quantity of commodity would be OM1. Similarly the equilibrium point in sub-market B lies at the point E2 where the marginal cost level meets the marginal revenue level of that sub-market. The corresponding quantity of the commodity in sub- market B is OM2.
Therefore quantity OM1 will be sold in sub-market A and quantity OM2 in the sub-market B. At the equilibrium point E1 in sub-market at the price of the commodity will be P1M1 as at the level of equilibrium output the average revenue is P1M1. In submarket B, at the equilibrium output the average revenue P2M2. So, the price of the commodity in that sub-market will be P2M2.
Therefore we can see the discriminating monopolist producing OM quantities in sub- market A at a price P1M2. He/She will sell OM2 quantity in sub-market B at a price P2M2. In the figure price is higher in sub-market A and lower in B. The monopolist has discriminated the two sub-markets and charged different prices for the same commodity.
Dumping:
An important application of the concept of price discrimination and its theory is found in the international scenario which is referred to as dumping. Dumping refers to the practice of charging a higher price in the domestic market and lower price which is net of transportation cost and tariffs in the foreign market for the same product. For dumping, the total market for the product is divided between domestic and foreign markets.
The markets are separated from each other due to geographical distances, tariffs, and quotas. The necessary condition for dumping is that in the domestic market the demand for the product is less elastic and more elastic in the foreign market.
We will be discussing simple case of dumping type of price discrimination when a producer is selling in the international market where he faces perfect competition like situation in the foreign market and has a monopoly in the domestic market. The demand curve for the product will be perfectly elastic for him in the international market and the demand curve will be sloping downward in the domestic market. Equilibrium is represented in figure 7.4.
In the domestic market in which the producer has a monopoly demand curve or the average revenue curve ARh is sloping downward so is the marginal revenue curve MRh. In the international or foreign market in which the producer faces perfect competition the ARf curve will be a horizontal straight line and the MRf curve will coincide with the ARf curve. MC is the marginal cost curve of output. The aggregate marginal revenue curve in this case as represented in the figure is the composite curve JFE is the outcome of the lateral summation of the MRh and MRf. We can see in the figure that the marginal cost curve MC intersects the AMR curve BFED at point E.
Therefore, an equilibrium output OW is determined. The total OW output is distributed between the foreign and the domestic market in such a manner that the Marginal revenue in each market is equal to each other and to the marginal cost ME. It can be visibly understood that when amount OH is sold in the domestic market, the Marginal Revenue is HF which is equal to marginal cost WE.
Thus, we can see that out of the total output OW, amount OH of the product will be sold in the domestic market. We can also observe that from the average revenue ARh it is clear that price OPh will be charged in the domestic market. Here, it is important to note that the rest of the amount HW will be sold in the foreign market at price OPf. The area DEFJ denotes the total profits earned by the producer from both the markets. Price in the foreign market OPf is lower than the price OPh.
This practice of charging lower price in the foreign market is termed as dumping. In the domestic market the elasticity of demand is less and therefore price charged is higher as compared to the foreign market where the elasticity of demand is higher.
Dumping of this form which is the most usual is referred to as the Persistent dumping. Another form of dumping is the Predatory dumping. This form of dumping is unfair because under this situation the producer deliberately sells the product in a foreign country at a lower price in order to eliminate the competitors and gain control of the foreign market.
Comments are closed.