The firm can still practise price discrimination, if, it has a monopoly in the domestic market, but faces perfect competition in the international market for his product. Here, the monopolist sells his product at a higher price in the home market and at a very low price in the foreign market.
This is called dumping, as the firm virtually dumps his product at a very low price in the foreign market, wherein it faces perfectly elastic demand curve. The price in the foreign market may even be lower than the average cost of production. The firm then suffer losses here.
However, the monopolist does not suffer an overall loss. By exploiting the home market, it can raise price above the average cost and earn monopoly profit, which might more than compensate for the foreign market losses.
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Fig. 14.11 illustrates how the price discrimination is possible by the monopolist in spatially separated markets. In protected domestic market, this monopolist faces downward sloping demand curve ARD. The corresponding marginal revenue curve MRD is also downward sloping.
However, the demand curve ARF of the concerned firm in the foreign market is horizontal straight line at the level of OPF price, as here; it is one among large number of competitors. In the foreign market, its marginal revenue curve MRF coincides with the demand curve ARF due to perfect competition there.
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On account of perfect competition in the foreign market, the firm has no freedom to determine price in the international market. Rather, it is a price taker here. However, the firm can fix the profit maximising price in the domestic market. Here, the price cannot fall below OPF level.
The price determination under dumping is slightly different from the one explained earlier, where the firm enjoys monopoly power in each sub-market. Under dumping, instead of taking just lateral summation of the two marginal revenue curves, we take the composite curve BCE as the aggregate marginal revenue (AMR) curve.
The firm will be in equilibrium at point ‘E’, where this curve is intersected by its given marginal cost curve MC from below. The equilibrium output OQF determined by dropping perpendicular on the X-axis is to be distributed between the home market and the foreign market in such a way that marginal revenue in each market is equal to each other and to the marginal cost EQF.
It is clear from Fig. 14.11 that ‘C’ is the point of equilibrium of the firm in the home market, where marginal revenue CQD is equal to marginal cost EQF. Thus, OQD amount of total output is sold in the home market.
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It is clear from the ARD curve of the firm that RQD or OPD price will be charged for OQD amount of output in the home market. The remaining amount OQF – OQD = QD QF of the total output will be sold in the foreign market. The total output in the two markets is OQD + QD QF = OQF.
The profit maximising equilibrium condition of the firm can be written as MRD = MRF = AMR = MC. The total profit of the firm is given by the shaded area shown in Fig. 14.11 between the aggregate marginal revenue curve BCE and the combined marginal cost curve MC.
Even under dumping, the relationship between price and the price elasticity of demand is clearly established. The concerned firm sells more output at a lower price in the foreign market (which has highest possible elasticity of demand) and less output at a higher price in the domestic market (which has less elastic demand).