What do we mean by Reverse Dumping?
Reverse dumping is the dumping of goods in a reverse manner- dumping or selling the goods at extremely low prices on the domestic market, while the same goods are sold at a much higher price on the foreign markets. Reverse dumping is not the conventional form of dumping. It can be short-term or sporadic as well as long-term or permanent in nature if the situation permits.
In this form of dumping, a manufacturer may price the product so low in the domestic market to such an extent that it does not even cover all costs. He may sell it at marginal cost or even suffer losses by selling the product for a certain period of time. Whereas it exports its products to international markets at a higher price, flourishes, and makes profits. The main purpose of such a form of dumping is to destroy all competition at the local level.
- What do we mean by Reverse Dumping?
- What are the necessary requisites for the success of Reverse Dumping?
- What are the advantages and disadvantages of Reverse Dumping?
- Frequently Asked Questions (FAQs)
The producer will eventually take the form of a monopoly. He can then raise the prices of his products on the domestic market at face value or close to foreign markets and sell the products at a profit. He will also be able to continue to sell at low prices on the domestic market so that he always maintains his dominant position. And the new entry of the competition remains difficult in his field.
What are the necessary requisites for the success of Reverse Dumping?
A number of conditions should be met for the success of such a form of dumping.
Price elasticity of demand
Since we know that in all dumping strategies price elasticity of the demand is an important factor and plays a very crucial role. In reverse dumping, the domestic market should have a very high price elasticity of demand for the dumped goods. Then only selling at lower prices will help to destroy competition. At the same time, this price elasticity of demand on foreign markets should be much lower or inelastic; such a situation provides a good playing field for the success of reverse dumping.
If the demand for goods on the domestic market is price elastic, the producer can further reduce the prices of his product on the domestic market. This will help to create the demand for his products. Consumers will shift their consumption from products of other brands to their own brands. Very soon, he will be able to conquer the entire market by displacing the competition. Rivals will be forced to close their stores and withdraw, as they will not be able to reach the low selling price for a long time. This will lead to the creation of a monopoly on the domestic market.
At the same time, the manufacturer will continue to sell the same products at a relatively higher price in foreign markets. This can be possible because demand is not very price elastic or maybe totally price inelastic. Hence, he will be able to enjoy higher profit margins in these markets and compensate for the loss it might suffer in the domestic market. And continue to make handsome profits at an overall level.
Absence of arbitrage opportunities
Another essential prerequisite for the success of reverse dumping is that there should be no arbitrage between two markets. It means that two different markets, in our case national and international, should have significant barriers between them. It should not allow a consumer – be it an individual or a company – to buy the product at a lower price on the domestic market and sell it at a higher price on the foreign market. Such a sale of goods on the two markets should only be possible for the dumping company to be successful.
Well established product
The product that is being dumped should be well established and well-known in foreign markets. The brand awareness should be high and consumers should remain loyal to this brand. The brand value should be so strong that consumers do not easily switch to other brands, which will help the manufacturer to sell these products with higher profit margins in these markets.
Absence of substitutes
There should be no substitute for the product that is being dumped on foreign markets. In other words, the manufacturer or seller should have a monopoly position in those countries and markets.
The lack of replacement products will ensure that consumers have no choice and cannot limit their consumption to other products or brands. Hence, they will have to buy these products at high prices, resulting in high profits for the seller.
Absence of government restrictions
An important prerequisite for the success of reverse dumping is that the government of these foreign markets should not pass any rules or restrictions that regulate or restrict the company’s dumping activities in its local market. It is possible that competitors from the domestic market turn to the government or anti-competitive bodies that regulate unfair trading practices against the company’s aggressive sales tactics.
Long-term underpricing of goods can often be seen as an anti-competitive measure. It becomes necessary that the investigating authority does not find the underpricing strategy in the company’s local market unfair. If it does, it can place orders and prohibit the company from participating in the dumping practice. This will lead to the end of the reverse dumping process in which the company has worked overtime.
What are the advantages and disadvantages of Reverse Dumping?
Reverse dumping is beneficial for consumers in their home country, as it leads to access to cheap products. The quality too is good as the producer cannot compromise, because his main objective is to drive competitors out of the market. This can only happen if the products meet the needs and expectations of consumers. Moreover, such dumping leads to significant sales volumes for the producer. He can take advantage of large-scale production and economies of scale. This will result in higher turnover and profit margins. Furthermore, it cannot afford quality problems with the product on the local market, as it sells the same product on foreign markets at a very high price.
Like any strategy, reverse dumping too has its own disadvantages. The local competition in the home country is totally destroyed by aggressive pricing. Other players cannot keep up with extremely low prices. Even if some match the prices in the short term, the continuous losses force them to cease operations soon. Such dumping can also be harmful for the dumping company. The presence of strong competition in the local market can hamper the company’s plan to dispose of the products and become a monopoly. It will continue to suffer heavy financial losses because it underprices its products, and soon it may run out of resources. Moreover, there is always the risk that the government or a trade authority will enact laws against the dumping practices of the company. In such situations, the entire dumping exercise will become futile and a waste for the company.
Frequently Asked Questions (FAQs)
Reverse dumping is an example of a non-conventional form of dumping.
In reverse dumping, manufacturers sell on the domestic market at a lower price than on the international market. Here, manufacturers want to conquer the domestic market once they have gained a strong foothold in the foreign market.
Following conditions are required for the success of reverse dumping.
a. A high level of price elasticity of demand.
b. Absence of arbitrage opportunity.
c. Well established product and foreign markets.
d. Absence of substitutes.
e. Absence of government restrictions with regard to import in the foreign markets.
f. Absence of any regulatory issues for dumping in the local markets.