Solution:

International Price Discrimination: Dumping

• In economics, "dumping" can refer to any kind of predatory pricing. However, the word is now generally used only in the context of international trade law, where dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price that is either below the price it charges in its home market or is below its costs of production.

• The term has a negative connotation, but advocates of free markets see "dumping" as beneficial for consumers and believe that protectionism prevent it would have net negative consequences.

• Advocates for workers and laborers, however, believe that safeguarding businesses against predatory practices, such as dumping, help alleviate some of the harsher consequences of free trade between economies at different stages of development (see protectionism).

• The Bluestein directive, for example, was accused in Europe of being a form of "social dumping," as it favored competition between workers, as exemplified by the Polish Plumber stereotype.

• While there are very few examples of a national scale dumping that succeeded in producing a national-level monopoly, there are several examples of dumping that produced a monopoly in regional markets for certain industries.

• Ron Chernow points to the example of regional oil monopolies in Titan: The Life of John D. Rockefeller, Sr. where Rockefeller receives a message from Colonel Thompson outlining an approved strategy were oil in one market, Cincinnati would be sold at or below cost to drive the competition's profits down and force them to exit the market.

• In another area where other independent businesses were already driven out, namely in Chicago, prices would be increased by a quarter.

• A standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charge for the same good in a domestic market. This is often referred to as selling at less than "fair value".

• Under the World Trade Organization (WTO) In the agreement, dumping is condemned (but is not prohibited) if it causes or threatens to cause material injury to a domestic industry in the importing country.

Legal issues:

• If a company exports a product at a price lower than the price it normally charges on its the home market is said to be "dumping" the product.

• Opinions differ as to whether or not this is unfair competition, but many governments take action against dumping to defend their domestic industries.

• The WTO agreement does not pass judgment. Its focus is on how governments can or cannot react to dumping it disciplines anti-dumping actions, and it is often called the "Anti-Dumping Agreement". (This focuses only on the reaction to dumping contrasts with the approach of the Subsidies & Countervailing Measures Agreement.)

• The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where it is genuine ("material") injury to the competing domestic industry.

• To do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter's home market price), and show that the dumping is causing injury or threatening to do so.

Disadvantages of Price Discrimination:

• 1. Some consumers will end up paying higher prices. These higher prices are likely to be allocatively inefficient because of P>MC.
• 1. The decline in consumer surplus.
• 1. Those who pay higher prices may not be the poorest.
• 1. There may be administration costs in separating the markets.
• 1. Profits from price discrimination could be used to finance predatory pricing.