Question

When a multinational firm decides to sell its products abroad, one of the risks the firm faces is that the government of the foreign market charges the firm with dumping. Dumping occurs when
A. The same product sells at different prices in different countries.
B. A firm charges less than the cost to make the product so as to enter or win a market.
C. Lower quality versions of the product are sold abroad so as to be affordable.
D. Transfer prices are set artificially high so as to minimize tax payments.

Answer 1

Answer:

The correct answer is B. A firm charges less than the cost to make the product so as to enter or win a market.

Explanation:

Dumping is a tactic of penetration into international markets, which consists in setting prices below the real cost at which the company has made the export (the company that sells to another country), making it possible for the prices of said product they are inferior in the foreign country than in the country that manufactured them.

Quite simply, dumping refers to cases in which a product is sold in another country at a lower price than it has been produced. For example, suppose the case of shoes.

Company A produces shoes at a cost of $ 10 in country A. Its intention is to sell them in country B. So, finally, it exports shoes to B and sells them for $ 8. That is, below the production price.

Why would a company sell below the cost of production? It seems weird that a company sells below the cost of production. Since this means losing money.

The intention behind this is to gain market share and expel competitors. If a company has the capacity to assume such losses for a certain period of time, and other companies do not, the consequence is clear. The most powerful company will remain in the market and the rest will have to close.

Once the competitors have disappeared, the company that sold below cost price takes advantage of its position of power to set higher prices and earn more money.