Setting the sales price of your goods or services is a central aspect of corporate strategy. Usually these prices should be higher than the manufacturing cost to make a profit. But the so-called dumping aims at a completely different sales strategy.
What is dumping?
The term dumping is understood to mean the sale of goods or services below their actual value . With this strategy, a company wants to stand out from the competition . This can lead to a general decrease in the market prices of products and services.
What is historical about dumping?
According to howsmb, the principle of price dumping is by no means a new problem. As early as 1931, a legal dispute was entered into to clarify the Benrath gas station case . The Reichsgericht decided in favor of the plaintiff at that time.
In the years that followed, more and more economists and auditors dealt with the problem of dumping prices. In 1947 Article VI of the GATT was introduced as an anti-dumping paragraph .
Since 1994 the anti-dumping law has been binding for all WTO (World Trade Organization) member states through Article VI “Agreement on the Implementation” .
What are the reasons for dumping?
If a company sells its products at dumping prices, this is initially only beneficial for the tempter, because he pays many times less than in the normal state. The reasons why a company sells its goods without economic profit can be complex:
- a competing company is to be pushed out of the market .
- It is hoped that it will be easier to enter the market through extremely low prices. A price calculation can help.
- the company wants to address a very specific target group .
- the vacancy rate or the storage costs are higher than the dumping prices
Especially in the service sector, start-ups tend to offer their service at a significantly lower value than other companies do. A big problem in this context is also the growing competition from foreign companies , which can offer their services at extremely low prices due to the lower labor costs.
What types of dumping do you have to distinguish?
One type of structure can be based on the concept being pursued or the regularity . So dumping prices can be divided into the following groups:
- persistent or permanent
Predatory dumping is a special kind . Here, a special competitor is damaged by the extreme lowering of prices for a certain period of time. So it is not intended to permanently weaken all competitors in the market economy, but rather only targets one company. The timing of the price dumping is based on the technical sales peak of the competing company.
Conditions for dumping
So-called unfair competition and dumping are to be prevented by extensive laws and controls.
So that anti-dumping measures can no longer show their full effect, two conditions must be met:
- a market segmentation occurs
- there is incomplete competition within an industry
Incomplete, industry-specific competition is when certain companies have a strong influence on the sales prices of goods. Not least for this reason, laws on unfair competition and a cartel ban were introduced in Germany.
When does dumping or unfair competition exist?
An unfair competition exists when a company over other companies behaving unfairly. According to § 4 UWG (unfair competition law) , this includes an aggressive sales method, blackening rival companies, imitation or the exploitation of third-party performance results. In addition, inducing a breach of contract and misleading advertising according to Section 6 UWG are also among the criteria for immoral behavior in the free market economy.
How can dumping be determined?
If it is to be determined whether there is dumping, it is not only necessary to make a rough estimate by comparing the sales prices . A comprehensive calculation of the following two key figures is important in this context:
The injury margin
This is the percentage difference between the domestic production costs and the prices offered. So the comparison here is by how much money the export prices have to be raised in order to be able to cover the domestic production costs.
The dumping margin
That is the percentage difference between the offered dumping prices and the normal, market-typical sales prices. So there is a direct comparison between normal value and low price.
After calculating the dumping margin and the injury margin, the amount of the anti-dumping duties can be determined. These are intended to compensate for the low prices.
What is the effect of dumping?
The primary effect is, of course, a reduction in the number of goods and services affected across the sector. Not only are the competing companies damaged by lost income, but also the company that carries out the dumping. The own production costs can no longer be covered, which results in a heavy loss.
If the price dumping is successful, there is a risk of a complete collapse of the relevant industry. Smaller companies in particular are threatened by insolvency proceedings due to a lack of sales or a lack of competitiveness in the market.