SHRI D.N.

INSTITUTE OF BUSINESS ADINISTRATION

MONOPOLY

Meaning and features:

Monopoly refers to market structure in which there is a single producer or seller

(opposite of perfect competition) of a company. In other words monopoly can exist
when there is no close substitute of any product in the market. Monopolist is a sole
trader in the market who produces a unique product and there is no competition.
Monopoly is defined – “as a small business supplying a service to a limited area.” For
example, a restaurant which supplies food and drink at the top of mountain of hill
station. Because, it is located at isolated place, it may charge higher price for its
product. Here, the restaurant owner is the monopolist. Another example can be a
caterer at football or cricket match.

Features:

We may state the features of monopoly as:

1. One Seller and Large Number of Buyers:

The monopolist’s firm is the only firm; it is an industry. But the number of buyers is
assumed to be large.

2. No Close Substitutes:

There shall not be any close substitutes for the product sold by the monopolist. The
cross elasticity of demand between the product of the monopolist and others must be
negligible or zero.

3. Difficulty of Entry of New Firms:

There are either natural or artificial restrictions on the entry of firms into the industry,
even when the firm is making abnormal profits.

4. Monopoly is also an Industry:

Under monopoly there is only one firm which constitutes the industry. Difference
between firm and industry comes to an end.

5. Price Maker:

Under monopoly, monopolist has full control over the supply of the commodity. But
due to large number of buyers, demand of any one buyer constitutes an infinitely
small part of the total demand. Therefore, buyers have to pay the price fixed by the
monopolist.

6.Nature of Demand and Revenue under Monopoly:

Under monopoly, it becomes essential to understand the nature of demand curve

facing a monopolist. In a monopoly situation, there is no difference between firm and
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industry. Therefore, under monopoly, firm’s demand curve constitutes the industry’s
demand curve. Since the demand curve of the consumer slopes downward from left
to right, the monopolist faces a downward sloping demand curve. It means, if the
monopolist reduces the price of the product, demand of that product will increase and
vice- versa. (Fig. 1).

In Fig. 1 average revenue curve of the

monopolist slopes downward from left to
right. Marginal revenue (MR) also falls
and slopes downward from left to right.
MR curve is below AR curve showing that
at OQ output, average revenue (= Price)
is PQ where as marginal revenue is MQ.
That way AR > MR or PQ > MQ.

Causes or Sources of Monopoly :

In real life, pure or complete monopoly is rare. This is because one firm can dominate
an industry. The possible causes or reasons or sources of monopoly are as follows –

(1) Patents, copyrights and trademarks : Patents are offered as rewards by the
government to motivate people to invent and create new things. Patent is given
to give legal protection so that nobody can copy the inventor’s invention during
the life of the patent. Copyrights and trademarks also provide similar legal
operation and thus results in monopoly (although limited).

(2) Control of an essential new material : If one firm controls the supply of an
essential input then the other firms will not be in a position to complete. Thus,
control of the source of supply such as minerals, workers, trade unions etc., by
one firm result into monopoly.

(3) Natural monopoly : A natural monopoly exists when only one firm can survive
in the industry naturally. Any firm can have natural monopoly when a single
firm satisfies the entire market at a price that covers full cost. under
technological and demand conditions, it is socially most efficient to have a
single firm supplying the entire market because the cost of supplying
(satisfying) market demand is at a minimum. Public utilities (facilities provided
by the government like electricity, railways, etc) provide the classic examples of
natural monopoly.

(4) Government control on entry : Government may control entry in certain

industries and may gain monopoly power at least locally, simply will restricting
entry. For example, it may control or restrict starting any new business in a
particular area.

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(5) Ignorance : Monopoly may continue because of ignorance of possible

competitors. This may happen when the competitors do not know about the
super normal profits earned by the existing firms or they may not be able to
obtain required know-how.

(6) A deliberate policy to exclude competitors : Some of the firm producing

same goods may create monopoly situation deliberately by forming an
association and acting jointly. It means that deliberate policy of some firms can
reduce competition and thereby control price and output of the good.

Nature of AR and MR curves :

Under monopoly, there are large numbers of buyers but there is only one seller. Due
to the monopoly power, monopolist is a price maker, that is, he can influence the
price. It means that, if the monopoly firm wants to sell more, it can reduce the price
and vice versa. This implies that AR will be high at lower output and low at higher
output. Thus, we find that AR curve (or demand curve) is downward sloping straight
line (or negatively sloping). Since monopolist is the only producer, the industry’s
demand curve (AR curve) and firm’s demand curve are one and the same. Since the
AR curve slopes downwards, MR curves will also be downward sloping straight line. As
AR is always less than AR, MR curve always lies below AR curve. This is explained
with the help of a table and a diagram –

Y
Units TR AR MR

1 8 8 8

2 15 7.5 7

3 21 7 6 Revenue

4 26 6.5 5 MC

5 30 5 4
MR

0 Quantity X

In the given table, AR and MR decline with every additional unit sold. It can also be
seen that AR is always greater than MR. Due to this reason, AR and MR curves slope
downward from left to right. But it shows that demand for the firm’s product is
inelastic & therefore any change in price will not have much effect on demand.

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Monopoly Equilibrium under Different Cost Conditions :

(1) Monopoly Equilibrium in case of Zero Marginal Cost (or No cost) :

Marginal cost is zero when it costs nothing to produce additional units of output.
For example, in case of mineral spring, cost of product of mineral water is zero.
In the same manner, marginal cost is zero when a product is already in
excessive amount and it is irrelevant to consider cost of production. In these
cases, the monopoly equilibrium will lie at a unit elasticity point on the demand
curve. In such cases, the monopolist has to decide at which output the total
revenue will be maximum. As total revenue is maximum at that level of output
at which marginal revenue is zero or elasticity = 1, the monopolist will get
maximum profit (and revenue) only when MR will be equal to MC at the output
where MC is also zero. This is shown in the given diagram –

In the given diagram, monopoly

Y

equilibrium is achieved at ON level of output,

where MR and MC both are zero. The
e>1
monopolist will sell ON units at OP price (or
AR &
MR P S e=1 NS). When monopolist will sell ON quantity at
OP price, he will get maximum total revenue.
Since MC (cost of production) is zero &
e<1

0 N MC=0
AR
X
elasticity on the AR curve is equal to one or
Output unity, the whole revenue will represent profits,
that is, total revenue will be equal to maximum
profit (PSNO).
MR

So, we can conclude that when cost of

product is zero, monopoly equilibrium will be
achieved at a level where e = 1.

(2) Rising, Constant and Falling Cost conditions :

Monopoly equilibrium can be achieved whether marginal cost is rising,

remaining constant of falling at the equilibrium output. The reasons is that the
second condition of equilibrium namely, MC should cut MR curve from below at
the equilibrium point, can be satisfied in the three cases. We can show the
equilibrium positions with the help of given diagrams –

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(i) Rising Cost Conditions : In this figure,

MC
Y
the MC curve is upward rising & the
monopoly firm is in equilibrium at point E
AC
where upward rising MC curve cuts MR
Q

curve from below. The equilibrium output

is OM and the monopoly price is OP. The Cost &
Revenue
E

firm earns Monopoly or Supernormal R

Profits shown by area PQRS. AR

MR

0 M Output X

(ii) Constant Cost Conditions : In the Y

given figure, MC curve is horizontal

straight line and MC is equal to AC. The P Q

monopoly firm is in equilibrium at point

E
E, the equilibrium output is OM and the Cost & S
AC=MC

monopoly price is OR. The firm earns Revenue

Monopoly or Supernormal Profits shown AR

by area PQES. MR

0 M Output X

(iii) Failing Cost Conditions : The given Y

figure shows that monopolist is in

equilibrium when MC is falling at the point Q
P
of equilibrium at point E where downward R
sloping MC curve cuts MR curve from S
E
below. The equilibrium output is OM and Cost &
Revenue AC
the monopoly price is OP. The firm earns
Supernormal Profits shown by area PQRS. AR
The equilibrium is not possible even in MR MC
monopoly if MC falls more rapidly than
MR and MC curve cuts MR curve from 0 M Output X

above.

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Monopoly Equilibrium (Firm & Industry) in Short-Run :

During the short period, the monopoly firm cannot change the size of the fixed factors
therefore output can be increased or decreased by changing the variable factors. In
order to maximize profit the monopolies must find out the output that maximizes the
difference between total revenue and total cost. As cost of production remains
unchanged the amount of profit earned by the monopolists depends upon price.

 If the demand fro the firm’s product increases, the supply cannot be increased
in order to meet the demand therefore the price of product rises.

 On the other hand, if the demand for the firm’s product decreases, the price of
the product may fall.

Thus, in short-run the monopoly price may be –

(1) Greater than Average Cost (Super Normal Profit)

(2) Equal to Average Cost (Normal Profit) or

(3) Less than Average Cost (Loss)

(1) If the monopoly price is greater than AC, the firm will earn supernormal
profits or monopoly profits. This shown in the given diagram –
Y

MC
AC R
L
P
Cost & M
Revenue S

MR AR
0 Q Output X

In the given diagram, the monopoly firm is in equilibrium at point E, where

MR = MC. The firm sells OQ output at OP price.

 The monopoly price = LQ

 The Average Cost = MQ

The monopoly price is greater than average cost (AR > AC), so the firm earn
supernormal profit or monopoly profits which are shown by shaded area
PLMS.

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(2) If the monopoly price is equal to average cost (AR = AC), the firm will earn
normal profits. This is shown in the given diagram –
Y
MC
AC

R
L
P
Cost &
Revenue

MR
AR
0 Q Output X

In the given diagram, the monopoly firm is in equilibrium at point E, where

MR = MC. The firm sells OQ output at OP price. As monopoly price is equal to
average cost (AR = AC) and Ac includes normal profit, the firm earns normal
profits.
(3) If the monopoly price is less than average cost (AR < AC), the firm will earn
subnormal profits or will incur losses. Here the monopolist will continue its
business if it can recover at least its AVC. This is shown in the given Diagram
–
Y
AC

MC
AVC
S M

P L
Cost &
Revenue

MR AR
0 Q Output X

In the given diagram, the monopoly firm is in equilibrium at point E, where

MR = MC. The monopoly firm sells OQ output at OP price. As monopoly price
is less than average cost (AR < AC), the firm incurs loss, which is shown by
the area PLMS.

Equilibrium of Monopoly Firm in Long-run :

In the long run, the monopoly firm can change its variable factors as well as fixed
factors. If the demand of the firm’s product increases, the firm can increase its
supply. In the long-run there is no possibility of entry of new firms in the industry. So
it can charge higher price for its product.

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Thus, in the long-run, monopoly price is greater than average cost (AR > AC). So, the
monopoly firm enjoys supernormal profits in the long run. This is shown in the given
diagram –
LMC
Y

LAC
P Q

R
S
Cost &
Revenue

T AR

MR
0 M Output X

The monopoly firm is in equilibrium at point T, where MR=MC. The firm sells OM
output and charges OP price. The monopoly price is greater than average cost, thus
monopoly firm earns supernormal profits as shown by shaded are PQRS.

However, this does not mean that normal profits are not possible in the long run. It
means that it may also get normal profits but more possibility is of earning
supernormal profits.But the monopoly firm will never suffer losses in the long-run. It
means that if monopoly price is less than average cost (AR<AC) in the long-run, the
monopoly firm will close down its business.

PRICE DISCRIMINATION

Meaning of Price Discrimination:

Does a monopoly firm always change a single uniform price for us product to all its
customers? The answer is that it need not always charge the same price to all
customers. Since a monopolist exercise the control over the supply of the product. He
can charge different price to different customers from the same product at the same
time. Thus, when the monopolist firm sells the same commodity at different prices to
different customers, it is known as discriminating monopoly or price discrimination.

According to Prof. Stonier and Hauge, “Discriminating monopoly of price

discrimination occurs when monopolist charges different prices for different units are
in fact homogeneous so far as their physical nature is concerned.”

Types of Price Discrimination:

Price discrimination may be either (1) personal (2) local or (3) trade

(1) Personal Discrimination occurs when different prices are charged from
different customers according to the intensity of their desire.

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(2) Local Discrimination takes place when a monopolist sells his product at
a lower price in one market and charges higher price in another market.

(3) Trade Discrimination ocures when a monopolist charges a lower price

for one trade use than for another trade or use.

Degrees of Price Discrimination :

Prof. A. C. Pigou has distinguished among the following three types price
discrimination :

1. Price discrimination of the first degree.

2. Price discrimination of the second degree and

3. Price discrimination of the third degree

First Degree Price Discrimination.

This will occur when the firm is able to charge each customer the maximum price
he or she is prepared to pay for the good or service. It is assumed that the firm
has very detailed knowledge of its consumers demand curves. The seller will sell
each unit of output depending upon the customers demand curve.

Perfect price discrimination occurs when the producer is able to charge every
consumer the price he is willing to pay, in this case the consumer surplus will be
equal to zero. This is shown in the diagram below.

Second Degree Price Discrimination

This type of price discrimination occurs when a firm is trying to sell off any excess
capacity it has remaining at a lower price than the normal published price. This is
often done in the airline and hotel industries, where spare seats and rooms are
sold at the last minute at greatly reduced prices.

In these industries fixed costs will typically be very large and marginal costs will
be relatively small and constant, e.g., the cost of having an extra person on an

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airplane or in a hotel is very small. The product can be provided at a constant

marginal cost until a rigid fixed capacity is reached; this means that the marginal
cost curve will be horizontal up to the point where full capacity is reached where it
becomes vertical. Second degree price discrimination can be shown on the
diagram below.

The firm will initially charge the profit maximising price of P1 and producing
quantity Q1. The firm will have a large amount of spare capacity; this is equal to
the difference between Q1 and Full Capacity. The firm will be willing to sell this
volume for any price so long as it covers the marginal cost of producing them, as
it will be the contributing to its fixed costs or profits. This will occur at the lower
price of P2 and increase total consumer surplus by xyz. The firm will also benefit
as there is no point in having empty rooms or seats. A hotel must remain open
and a plane must fly even if there only a few paying customers.

Examples of second degree price discrimination can be seen in any market where
excess capacity needs to be eliminated, examples are:The traditional end of
season sale.Reduced prices for cinema and theatre in the afternoons. Last minute
bargain holidays. etc

Third Degree Price Discrimination

There are basically three main conditions required for price discrimination to take
place

 Monopoly power

 Separation of the market

 Elasticity of demand -.

Examples of price discrimination:There are numerous good examples of

discriminatory pricing policies. We must be careful to distinguish between
discrimination (based on consumer's willingness to pay) and product
differentiation - where price differences might also reflect a different quality or

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standard of service. Some examples of discrimination worth considering include:

 Cinemas and theatres cutting prices to attract younger and older audiences

 Student discounts for rail travel, nightclubs, restaurant meals and holidays

 Happy hour in bars,Expensive taxi fares during the night Hotels offering cheap
weekend breaks and winter discounts

The aims of price discrimination

It must be remembered that the main aim of price discrimination is to increase

the total revenue and hopefully the profits of the supplier. It helps them to off-
load excess capacity and can also be used as a technique to take market share
away from rival firms. It is possible to demonstrate on a diagram how a
monopolist is able to earn greater profits by discriminating. Assume that a
monopolist is able to divide its market into two - A and B - and that the costs of
production are identical in each market.

The firm needs to allocate production between the two markets so that the
marginal revenue in each market is identical in order to maximise profit. This
occurs because if the firm was earning more in market A it could earn more
revenue by switching goods from B to A. If MR in market A is £10 and market B
£6, the firm could gain an extra £4 by switching the marginal unit of production
from B to A. It will keep doing this until there is no more advantage in doing so,
which is when the MRs are even.

We draw the MRs and ARs in markets A and B first. These are then horizontally
summed to give the total market. The profit maximising monopolist will produce
where MC=MR across the whole market at an output level QM. This output is then
split between the two markets (QA and QB) so that the MR is equal (MR). The AR
curve in each of the markets will determine the relevant price (PA, PB and PM).

The average cost is the same in all of the markets, and the levels of abnormal
profit in each market are shown by the shaded area.

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The monopolist will be better off if the profits earned in markets A and B are
greater than in the total market.

Some consumers do benefit from this type of pricing - they are "priced into the
market" when with one price they might not have been able to afford a product.
For most consumers however the price they pay reflects pretty closely what they
are willing to pay. In this respect, price discrimination seeks to extract consumer
surplus and turn it into producer surplus (or monopoly profit).

It is possible that cross-subsidisation may occur as the profits earned in one

sector are used to subsidise the losses made in another market. This may be
beneficial to society as a whole, e.g., allowing train companies to operate rural
services during off-peak periods.

When Price Discrimination is Possible?

1. The demand must not be transferable from the high price market to low priced
market. This happens when the markets are split upon the basis of wealth. For
example, a rich man will not like to become poor in order to enjoy the benefits
of paying lower fees to a doctor. Similarly if rich people do not buy deluxe
edition of certain popular books and wait for cheaper edition of certain popular
books, personal price discrimination in books will not be possible. Thus, there is
no possibility of transferring a unit of the commodity from the high priced
market to the low priced market.

2. There should not be any possibility of resale of products or service in the

customer of in the low priced market to the customer in the high priced market.
If for example, the customers to whom the product is sold at a low prices are
charged for the same product, the firm will not be able to carry out it’s policy of
price discrimination. If industrial buyer of cheap electricity can resale it for
direct consumption for house hold purpose, there will not be the two prices for
the electricity.

3. Price discrimination becomes possible due to ignorance and laziness of the

buyer. It can happen when the buyer of the dearer market are quite ignorant of
the fact that a seller is selling a same product at a lower price in another
market. Similarly even if the customers are aware of this fact but due to this
laziness if they do not go to purchase in the cheaper market, price
discrimination will persist.

4. Sometimes price discrimination occurs when the price differential is so small

and negligible those buyers do not consider it worth while worrying about it.
Many a times, a buyer has a tendency to ignore small differences in prices.

5. Price discrimination exists when the consumer has an irrational feeling that
though he is paying a higher price, he is paying it for better goods, although it
may be for same quality. For example, it is probably irrational to think that one
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gets the better view of the firm from the front raw of Rs. 6 tian from the back
raw of Rs. 5. Sometimes different prices are charged for different varieties.
Although they only differ only in name of label. In this connection, Mrs.
Robinson very aptly observes, “Various brand of a certain article which infect
are almost like may be sold as different qualities under names and label which
induce rich and snobbish buyer to divide themselves from poor buyers and in
this way the market is split up and the monopolist can sell what is substantially
the same thing at several prices.”

6. Discrimination always occurs when the markets are separately by long distance
or traffic barriers so it becomes very costly to transfer goods from cheaper
market to be resold in a dearer market. For example, a product may be sold for
Rs. 2 in one town and in another town for Rs. 2.50. Now, so long as the
transport cost is equal to or more than 50 ps. per unit, the resale will be
profitable but if it is equal, to or more than 50ps. resale will not be profitable.
Similarly when a producer selling his goods on two different markets. Say in
home market which is protected by a tariff and in a foreign market than on the
home market. This device of selling the goods at cheaper rate in the foreign
market than in the home market known as dumping.

7. Price discrimination also occurs when the nature of the goods is such that it is
possible for the seller to charge different prices for different customers. This
happens when goods in question is a direct service. Thus goods say radio,
electric fan, fountain pen, watch, cloth etc. can be resold, the same is not
possible in the personal services like those of doctor, lawyer, teacher, nurse,
musician etc. Since resale of this direct services is impossible, differences in the
prices can exist for different customers. For example surgeons charge different
prices from rich and poor patients for performing similar operations.

8. Sometimes prices discrimination becomes possible when several groups of

buyers require the service for clearly differentiated commodities. For example,
railway charge different freight rates for the transport of cotton and coal. In this
case price discrimination is possible since bales of cottons can not be turned
into loads of coal in order to take advantage of the cheaper rate of transport for
coal.

When price discrimination is Profitable:

The circumstances may all be favorable to a monopolist that is, price discrimination
may be possible and yet it would not be pursued. If it does not add to profits of the
monopolist firm. For the price discrimination to be profitable. Following two conditions
are fulfilled :

1. The elasticity of demand fro a product at a single price should be different in

different markets.

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2. The cost of keeping markets separate should not be high relative to price
differential.

1. Let us first understand the condition of profitability. We know that demand

curve for product is downward slopping, marginal revenue is less than price.
The difference between price and marginal revenue depends on the value of
price elasticity of demand, the smaller will be obvious. When a demand for
product is highly elastic. They have to be reduced by a very small amount
elastic, price. Hence it is possible to find out marginal revenue on the basis of
following formula, if prices and the value of price elasticity of demand are given.

P
{
e1}

MR
e

Where, MR = Marginal Revenue

P = Price

E = Price elasticity of demand

Now, with the help of this formula, it can be proved that when price elasticity of
demand for a monopolist product is same at a single price in different markets,
price discrimination will not be profitable. Suppose there are two markets. If
price of product is Rs. 2 in both markets. If price of a product is Rs. 10 in both
markets, marginal revenue will be Rs. 5 in both markets (10*2-1 = 5 ………..)

If monopolist transfer a unit of the product from market A to market B or from

market B to market A in order to charge different prices in them, the aggregate
revenue from two markets will remain same as before. Profit will not increase.
If he transfers a unit of product from market A to market B, his revenue will
decrease by Rs. 5 in market A and it will increase by Rs. 5 in market B. The
gain realized in market B is fully wiped cut in loss in market A. Hence, the
monopolist will not resort to price discrimination.

2. According to 2nd condition the cost of keeping different markets separate

should not be high relative to price differential. For example if a owner of a
theatre has to spend a large amount of money in keeping various classes
separate to provide better facilities to upper classes cinegoers, maintenance of
doorkeepers for different classes etc. then price discrimination may be possible
but it will not pay him.

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Dumping

1. Meaning of Dumping:

Dumping is an international price discrimination in which an exporter firm sells

a portion of its output in a foreign market at a very low price and the remaining
output at a high price in the home market Haberler defines dumping as: “The
sale of goods abroad at a price which is lower than the selling price of the same
goods at the same time and in the same circumstances at home, taking account
of differences in transport costs”

2. Types of Dumping:

Dumping can be classified in the following three ways:

1. Sporadic or Intermittent Dumping:

It is adopted under exceptional or unforeseen circumstances when the domestic

production of the commodity is more than the target or there are unsold stocks
of the commodity even after sales. In such a situation, the producer sells the
unsold stocks at a low price in the foreign market without reducing the domestic
price.

2. Persistent Dumping:

When a monopolist continuously sells a portion of his commodity at a high price

in the domestic market and the remaining output at a low price in the foreign
market, it is called persistent dumping. This is possible only if the domestic
demand for that commodity is less elastic and the foreign demand is highly
elastic. When costs fall continuously along with increasing production, the
producer does not lower the price of the product more in the domestic market
because the home demand is less elastic.

3. Predatory Dumping:

The predatory dumping is one in which a monopolist firm sells its commodity at
a very low price or at a loss in the foreign market in order to drive out some
competitors. But when the competition ends, it raises the price of the
commodity m the foreign market. Thus, the firm covers loss and if the demand
in the foreign market is less elastic, its profit may be more.

Objectives of Dumping:

The main objectives of dumping are as follows:

1. To Find a Place in the Foreign Market:

A monopolist resorts to dumping in order to find a place or to continue himself

in the foreign market. Due to perfect competition in the foreign market he
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lowers the price of his commodity in comparison to the other competitors so

that the demand for his commonly may increase. For this, he often sells his
commodity by incurring loss in the foreign market.

2. To Sell Surplus Commodity:

When there is excessive production of a monopolist’s commodity and he is not

able to sell in the domestic market, he wants to sell the surplus at a very low
price in the foreign market. But it happens occasionally.

3. Expansion of Industry:

A monopolist also resorts to dumping for the expansion of his industry. When he
expands it, he receives both internal and external economies which lead to the
application of the law of increasing returns. Consequently, the cost of
production of his commodity is reduced and by selling more quantity of his
commodity at a lower price in the foreign market, he earns larger profit.

4. New Trade Relations:

The monopolist practices dumping in order to develop new trade relations

abroad. For this, he sells his commodity at a low price in the foreign market,
thereby establishing new market relations with those countries. As a result, the
monopolist increases his production, lowers his costs and earns more profit.

3. Price Determination under Dumping:

Under dumping, the price is determined just like discriminating monopoly. The
only difference between the two is that under discriminating monopoly both
markets are domestic while under dumping one is a domestic market and the
other is a foreign market. In dumping, a monopolist sells his commodity at a
high price in the domestic market and at a low price in the foreign market.

a. Conditions:

Price determination under dumping is based on the following conditions

or assumptions:

1. The main aim of the monopolist is to maximise his profit.

In other words, dumping profit = MRH + MRF = MC.

2. The elasticity’s of demand must be different in the two markets.

3. The foreign market should be perfectly competitive and the domestic market
is monopolistic

4. The buyers in the domestic market cannot buy the cheap commodity from
the foreign market and bring it in the domestic market.

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b. Explanation:

Given these conditions, price and output under dumping will be determined by
the equality of the total marginal revenue curve and the marginal cost curve of
producing the commodity. Figure 5 illustrates price-output determination under
dumping.

The foreign market demand curve faced by the monopolist is the horizontal line
PDFwhich is also the MR curve because the foreign market is assumed to be
perfectly elastic. The demand curve in the home market with a less elastic
demand for the product is the downward sloping curve DH and its corresponding
marginal revenue curve is MRH. The lateral summation of MRH and PDF curves
leads to the formation of TREDF as the combined marginal revenue curve.

In order to determine the quantity of the commodity produced by the

monopolist, we take the marginal cost curve MC. E is the equilibrium point
where the MC curve equals the combined marginal revenue curve TRED F. Thus
OF output will be produced for sale in the two markets. Since FE is the marginal
cost, equilibrium in the domestic market will be established at point R where
the marginal cost FE equals the MRH curve (FE = HR).

Now OH quantity will be sold at HM price in the home market and the remaining
quantity HF will be sold in the foreign market at OP (= FE) price. Thus the
monopolist sells more in the foreign market with the more elastic demand at a
low price and less in the home market with the less elastic demand at a high
price. His total profits are TREC.

4. Effects of Dumping:

Dumping affects both the importer and exporter countries in the

following ways:

1. Effects on Importing Country:

The effects of dumping on the country, in which a monopolist dumps his

commodity, depend on whether dumping is for a short period or a long period
and what are the nature of the product and the aim of dumping.

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1. If a producer dumps his commodity abroad for a short period, then the
industry of the importing country is affected for a short while. Due to the low
price of the dumped commodity, the industry of that country has to incur a loss
for some time because less quantity of its commodity is sold.

2. Dumping is harmful for the importing country if it continues for a long period.
This is because it takes time for changing production in the importing country
and its domestic industry is not able to bear competition. But when cheap
imports stop or dumping does not exist, it becomes difficult to change the
production again.

3. If the dumped commodity is a consumer good, the demand of the people in

the importing country will change for the cheap goods. When dumping stops,
this demand will reverse, thereby changing the tastes of the people which will
be harmful for the economy.

4. If the dumped commodities are cheap capital goods, they will lead to the
setting up of a now industry. But when the imports of such commodities stop,
this industry will also be shut down. Thus ultimately, the importing country will
incur a loss.

5. If the monopolist dumps the commodity for removing his competitors from
the foreign market, the importing country gets the benefit of cheap commodity
in the beginning. But after competition ends and he sells the same commodity
at a high monopoly price, the importing country incurs a loss because now it
has to pay a high price.

6. If a tariff duty is imposed to force the dumper to equalise prices of the

domestic and imported commodity, it will not benefit the importing country.

7. But a lower fixed tariff duty benefits the importing country if the dumper
delivers the commodity at a lower price.

2. Effects on Exporting Country:

Dumping affects the exporting country in the following ways:

1. When domestic consumers have to buy the monopolistic commodity at a high

price through dumping, there is loss in their consumers’ surplus. But if a
monopolist produces more commodities in order to dump it in another country,
consumers benefit. This is because with more production of the commodity, the
marginal cost falls. As a result, the price of the commodity will be less than the
monopoly price without dumping.

But this lower price than the monopoly price depends upon the law of
production under which the industry is operating. If the industry is producing
under the law of diminishing returns, the price will not fall because costs will
increase and so will the price increase.
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The consumers will be losers and the monopolist will profit. There will be no
change in price under fixed costs. It is only when costs fall under the law of
increasing returns that both the consumers and the monopolist will benefit from
dumping.

2. The exporting country also benefits from dumping when the monopolist
produces more commodity. Consequently, the demand for the required inputs
such as raw materials, etc. for the production of that commodity increases,
thereby expanding the means of employment in the country.

3. The exporting country earns foreign currency by selling its commodity in

large quantity in the foreign market through dumping. As a result, its balance of
trade improves.

5. Anti-Dumping Measures:

The following measures are adopted to stop dumping:

a. Tariff Duty:

To stop dumping, the importing country imposes tariff on the dumped commod-
ity consequently

b. Import Quota:

Import quota is another measure to stop dumping under which a commodity of

a specific volume or value is allowed to be imported into the country.

c. Import Embargo:

Import embargo is an important retaliatory measure against dumping. Ac-

cording to this, the imports of certain or all types of goods from the dumping
country are banned.

d. Voluntary Export Restraint:

To restrict dumping, developed countries enter into bilateral agreements with

other countries from which they fear dumping of commodities. These
agreements ban the export of specified commodities so that the exporting
country may not dump its commodities in other country.

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