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Dumping & Price Discrimination in global market/Determination of equilibrium output and prices

under Dumping:
Dumping is a special type of price discrimination in which a monopolist fixes a higher price for his
product in the home market and a lower price for the same product in the foreign market so as to
capture the foreign market. We examine price and output determination of such a monopolist as
follows.
Consider a firm that is a monopolist in its home country and which is protected from foreign
competition by tariffs and other import restrictions. Suppose that there are no export restrictions, so
the firm could, if it wished, also sell the good in the world market where there is a perfectly competitive
market for the good in question. The firm situation is shown in fig. 1. The firm’s domestic monopoly is
represented in panel A by the downward-sloping demand curve AD with marginal revenue curve MR
1
.
Price & MR
A Price Price & MR MC
Pd A
Pc PC Pc B
… MR1 + Pc
D
O E Quantity O Quantity O E F Quantity
MR1
Panel A: Domestic Market Panel B: World Market Panel C: MC & horizontal sum of MR curves
The world market as seen by this firm is shown in panel B where the competitive price is P
c
. The firm is a
price taken in the world market, so the horizontal line P
c
is also the firm’s marginal revenue schedule for
exported output.
The monopolist firm will allocate any given level of total output between the domestic and foreign
markets so as to have equal marginal revenue in each. The horizontal sum of MR
1
and P
c
is shown in
Panel C of fig 1. The downward-sloping segment AB in Panel C corresponds to the segment of MR
1
that
lies above the world price. Thus, if output is OE or less, all of it will be sold domestically and the firm will
not enter the world market. For outputs larger than OE, the relevant marginal revenue is the foreign
price, P
c
. This is shown by the horizontal segment of MR
1
+P
c
in Panel C. The explanation of this
horizontal segment is intuitively clear; for outputs above OE, the marginal revenue in the domestic
market is less than the world price. Thus the firm never has to settle for less than P
c
, for any unit its sells.
To find the profit-maximising total output, we locate the point where the firm’s marginal cost
schedule intersects the horizontal sum of the marginal revenue curves. This happens at output OF in
Panel C. this output is larger than OE, so we know that some output will be sold in the world market. In
fact, we know from the above discussion that no more than OE units will be sold in the domestic market.
Thus, it is easy to see that OE units will be sold in the domestic market. Thus, it is easy to see that OE
units will be sold in the domestic market. Thus, it is easy to see that OE units will be sold domestically
and the remaining EF units will be exported. The domestic sales occur at price P
d
(In Panel A), and the
foreign sales are made at the competitive world price P
c.
Domestic price is above the world price because the firm is a price-discriminating monopolist. In
international trade it is more common to describe the above situation as “dumping.” Sometimes a
government will wish to encourage exports as a means of improving the balance of trade or to acquire
larger holding of foreign currencies.