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Entrant Theory Of Dumping

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In international trade, the term “Dumping” is used to name a phenomenon consisting substantially in a predatory pricing practice. In fact, Dumping occurs when a country or a company export a product at a price which is lower in the foreign market with respect to the domestic one. Basically this represents a way through which exporting companies/countries strive to gain foreign market share in order to be more competitive in the international context. However, since Dumping often involves substantial volumes when exporting a product, it is said to be dangerous to the financial viability of the producers/manufacturers of that same product in the importing country. This happens because it could be that domestically produced goods may result to …show more content…

Thus it will simply set its normal monopoly price and the high-cost incumbent will imitate it in order to deter entry. The entrant does not learn anything from the observation of the first period prices, and decides on whether to enter or not on the basis of its ex ante probability of facing a weak incumbent. It is necessary that this probability is low enough fot the pooling equilibrium to exist since the entrant would stay out if it expects a high probability to face a strong incumbent and …show more content…

Scharfstain analysed the “test-market predation” model in 1984, where the entrant has a new product and is not sure about the demand for it. Because of this uncertainty, the entrant introduces this new product in a test-market in order to study how it would be received. In this moment the incumbent could embrace predatory activities (such as secret price discounts to loyal consumers) in order to make the entrant think that the demand would be low, thus preventing him to enter the market. Two years later, in 1986, Fudenberg and Tirole suggest that the incumbent could also engage in “signal-jamming predation”, inhibiting the entrant from improving its information. For example, in a test-market model, the entrant probably knows that the demand for the new product is low because of the predatory activity engaged by the incumbent. However, it cannot know how the demand would be in a normal competitive situation. Because of the lack of information, the entrant will possibly decide to exit the market. Financial market models of “long-purse”

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