Question

What is price discrimination? Explain why Dumping in international trade is a form of price discrimination.

Answer 1

Price discrimination is the pricing policy where a seller charges different prices for the same good in different market. To be effective and profit-enhancing, price discrimination is profitable only when the seller can effectively segment the market with different elasticity of demand in each segment (therefore, charging a lower price in more elastic segment, and charging higher price is more inelastic segment), and when re-sale across segments is not possible.

Dumping occurs when a country exports its goods in foreign market and charges a lower price in foreign market than in domestic market. Since marginal cost of the good is the same in domestic and foreign markets, selling the good at higher price in domestic market and at lower price in foreign market (often at a price less than its cost) is a form of price discrimination.