What do we mean by Predatory Dumping?
Predatory dumping is an unfair form of price discrimination that takes place across national borders or internationally. It is more permanent or occurs more frequently than the sporadic form of dumping. But it is less permanent than the “Persistent” form of dumping. The main objective of such a form of dumping is to price products in such a way that local competition in the destination country is completely destroyed. In other words, prices are set so low abroad that consumers no longer use the products of other brands. Instead, the majority shifts their consumption to this particular foreign brand. In the long term, this form of dumping leads to the formation of a monopoly. Since local manufacturers could not survive this onslaught of substantial price reductions, the shutters are slowly being lowered.
“Intermittent” dumping is another term for the predatory form of dumping. The exporter sells his products at a price lower than what he sells in his home country. The aim is first to conquer the foreign market. Then, slowly and steadily, the exporter eats away all competition and becomes the market leader. Finally, the exporter becomes a monopoly power abroad. He starts to increase the price of the goods again to compensate for his previous losses. Since there is no competitor in the market, since all were wiped out in the past, consumers have no choice but to buy these products at a higher price.
Predatory Dumping -Requirements for the Success
The first and most important prerequisite for a company that relies on predatory dumping abroad is very deep pockets / financial strength. By this, we mean that it must have enormous financial resources to support its dumping rate. Companies usually sell at their marginal cost or even sell at a price at which they cannot even cover their basic costs. To finance this loss for a longer period of time, the company should have sufficient financial resources and liquidity to be successful.
The process of entering a foreign country and achieving the ultimate goal of becoming a monopoly there is very long and tedious. If funding is limited, the company will be unable to maintain its strategy of selling below its cost for long. In such a case, the entire exercise of predatory dumping will be useless. It will cause permanent damage to the reputation and goodwill of the company that relies on predatory dumping. Also not to mention the high financial losses that would be incurred by the company.
Price elasticity of demand
There should be a price elasticity in demand for the products that the company intends to dispose of abroad. This means that the demand for these products should respond to a change in the price of these products. As part of the strategy of predatory dumping, the company reduces the price of its products. This, of course, with the aim of quickly entering the foreign market. And thus gaining a considerable market share in a short period of time. Since the product has price elasticity in demand, a reduction in prices will inevitably lead to a positive reaction from customers. Demand for its products will soar, and that of its competitors will fall.
This price elasticity of demand will eventually drive competitors out of the market. And the company will be able to establish itself as a monopoly in a foreign country. In addition, there is the possibility of unforeseen competition on the foreign market. Other players can also compete with the price reduction in the foreign market. In such a case, the company that relies on predatory dumping can further reduce the prices of its products. With the price elasticity of demand at present, the demand will eventually increase for its products. The competition will not be able to keep up with the low prices for long and will eventually exit the market.
Re-emergence of competition
The competition already driven out of the market should not emerge as a challenger again after some time. Moreover, the product and the segment should be such that new entrants do not easily establish themselves in the same product line. In other words, there should be sufficient barriers to entry into the business segment. It can be either due to high investment requirements or due to country-specific political restrictions. In this case, the company that has entered the country through predatory dumping will not be able to establish itself as a monopoly. Moreover, in such a situation, it may not have the flexibility to raise product prices in the long term. This would deal a serious blow to its long-term plan to make profits abroad.
Government and international trade regulations
For the success of predatory dumping, it is essential that the government and international trade regulators do not impose curbs and restrictions on those products in the long term. These restrictions may include imposing anti-dumping import duties and tariffs, setting up an import quota or an embargo, entering into trade agreements, etc. International trade regulators, such as the World Trade Organization (WTO) and the European Union (EU), may advocate total censorship of such activities in the respective countries.
Example of Predatory Dumping
Let us understand predatory dumping with the help of an example. The case dates back to 2012 when the US retail chain Walmart acquired a 51% stake in the local retail chain of Massmart in South Africa. Massmart was then the second-largest distributor of consumer goods in South Africa. Walmart’s sole intention was to sell its products at rock-bottom prices through the network of Massmart stores and distribution chains. This has forced competition out of the market after some time. The merged entity would become the only operational player in the country. And thus take the form of monopoly power.
The South African national competition tribunal immediately sprang into action. It imposed a series of restrictive and corrective measures to take full control of the deal. The merger had led to a loss of work for over 500 workers of Massmart. It reinstated those workers back to their work. And ensuring that no one lost their jobs as a result of the merger. The tribunal made the merged entity create an R100 million program for compulsory purchase from local suppliers of South Africa to ensure the creation of local jobs, localization, and industrial development.
In addition, the merger also caught the attention of the WTO. The WTO tribunal immediately imposed quantitative restrictions. According to this, only a limited amount of goods could be imported or even exported from South Africa within the specified period of time. It was intended to ensure that Walmart did not flood the country with its underpriced products and destroy local industries.
Quiz on Predatory Dumping