The firm can still practice 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 feces perfectly elastic demand curve. The price in the foreign market may even be lower than the average cost of production. The firm then suffers 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.
Fig. illustrates how the price discrimination is possible by the monopolist in ...view middle of the document...
Rather, it is a price taker here. However, the firm can fix the profit maximizing 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. 4 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.
Fig. 4: Price Determination under Dumping
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 = QDQF of the total output will be sold in the foreign market. The total output in the two markets is OQD + QDQF = OQF. The profit maximizing 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. 4 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).