Dumping – definition
Selling products at a low or even zero margin is not yet dumping. Price dumping is a practice in which products or services are sold at prices lower than the cost of production.
The purpose of dumping in its basic (most familiar) variant is usually to eliminate competition. Undercutting is used by companies that have an advantage in the market (for example, through diversification). In this situation, they can afford to make temporary losses from one branch of their business – for the time required for less prosperous competitors to withdraw from the battle for customers.
In the short term, dumping may seem like a positive phenomenon for customers – they then have the opportunity to buy products or services at extremely low prices. However, these bargains last for a very limited time. As soon as the dumping company gets its way, i.e. monopolizes the market, it will begin to dictate terms and therefore raise prices – gradually or sharply. Deprived of competition, it can – in theory – raise prices indefinitely. In this way, it will finally lead to a situation in which customers – having no choice – will be forced to buy its product, regardless of the price.
Important!
Dumping is an unfair practice that is actively fought by competition authorities, both domestic and international. The use of dumping is in violation of the law, and the detailed rules and consequences discusses Act of April 16, 1993 on combating unfair competition .
Dumping variants
Dumping is not always used to completely eliminate competition. Price undercutting occurs in various forms – depending on the methods adopted, the objectives, and even the area of occurrence.
Dandruff or predatory dumping
When we think of dumping, we most often think of this variant. In this variant, the company has plans to monopolize the market and is prepared to incur significant losses in the first phase of implementing the strategy. What’s more, predatory dumping is characterized by violent action, intended to have an electrifying effect. Prices are then lowered drastically, over a short period of time, for example, by offering discounts of several tens of percent and keeping them low for as long as the situation demands.
All because, in the long run, the dumping company intends to make up for its costs. As soon as there is a lack of competition, it will raise prices – perhaps just as sharply as when it was lowering them, but this time adding a few to tens of percent over the original price. It will be able to afford to do so because there will be a lack of competition, which would normally have the effect of regulating the market.
Dumping loot is particularly mono condemned by the authorities that control the markets.
Fixed Dumping
The goal of permanent dumping is the same as that of dandruff, but the methods – a bit more lenient. In this way, the company eliminates competition gradually, while trying to do it in a way that does not draw the attention of the controlling authorities.
A strategy using permanent dumping can be spread over many months or even years. In this case, the reductions may be less significant, but still attractive to customers and troublesome to competitors.
Occasional dumping
This variant of dumping differs strongly from the previous ones. The purpose of sporadic dumping is not to get rid of competition, but to increase demand; and sometimes to “win” in a hot sales period.
Sporadic dumping is used on a short-term basis, during peak sales periods – such as around Christmas. With low prices on a product or group of products, stores draw customers to them, while encouraging them to buy other – no longer so cheap – products and services.
Credit dumping
In credit dumping, companies offer their contractors (usually foreign) very attractive financing for purchases. They spread payments over a longer period than usual, with low- or no-interest installments. In this way, the dumping company’s products become very attractive – so much so that it no longer makes sense for the customer to use the services of a competitor.
The concept of credit dumping tends to be applied only in the context of B2B sales, especially overseas. However, a similar practice is very attractive product financing offers in retail. Spreading the purchase over dozens of installments, 0% installments, not having to pay for the first few months – all bear the hallmarks of credit dumping.
The difference, however, is that these practices are widespread. So while they do force other sellers to conform to some extent, they are not treated as dumping.
Currency dumping
This is a specific type of dumping, in which a company closely tracks changes in currency exchange rates and then uses this knowledge to sell its products abroad at discounted prices.
Social dumping
In this variant, companies take advantage of extremely low production costs in certain countries and move production there. With this move, they can set the prices of their products exceptionally low relative to companies that produce locally.
Technological dumping
In technology dumping, companies sell advanced technological solutions (IT systems, applications, but also robots and other very expensive products and services) at discounted prices. All of this is done to weaken the competition and then make contractors dependent on using their own solutions.
Price dumping – illegal or just unwelcome?
That dumping practices are unfair seems obvious. Control authorities, national governments and international bodies (e.g., the European Commission) actively fight against acts of unfair competition. Both in Poland and in the European Union there are anti-dumping laws. In our country, the most important act in this context is the previously mentioned Act on Combating Unfair Competition.
The law provides not only for sanctions for unfair practices, but also for preventive measures. The law includes a full catalog of acts of unfair competition, i.e., actions that carry penalties. These include:
- marking goods or services with a false or fraudulent geographical indication indicating the place of origin,
- labeling of goods or services that may mislead customers (relates to origin, composition, workmanship, applicability, repair, etc.),
- pozyskanie, ujawnienie i/lub wykorzystanie informacji stanowiących tajemnicę przedsiębiorstwa.
Important!
Most relevant in the context of dumping is Article 15.1 of the law, which states:
It is an act of unfair competition to impede other entrepreneurs’ access to the market, in particular by:
- selling goods or services below the cost of producing or providing them, or reselling them below the cost of purchase in order to eliminate other entrepreneurs,
- Inducing third parties to refuse to sell to other traders or not to purchase goods or services from other traders,
- substantively unjustified, differential treatment of certain customers […].
What penalties do companies face for dumping?
Dumping companies can be punished in various ways provided by anti-dumping regulations. These include:
- Anti-dumping duties – also known as countervailing duties, are fees that are imposed on unfair traders. They are intended to compensate for the damage caused and bring the affected market back to its optimal situation. History shows that the amount of anti-dumping duties varies from a few to several tens of percent.
- Penalties imposed by the OCCP – the Office of Consumer and Competition Protection can impose a penalty on a company that has been proven to use unfair practices. This applies primarily to local market situations.
How to protect against dumping?
An entrepreneur’s dumping activities do not have to pose a threat to the interests of customers for the OCCP to step in. Piotr Kister of the law firm Rachelski and Partners argues that a high probability of such a threat is sufficient for the office.
In practice, however, the OCCP most often initiates proceedings in response to a notification from a company against which competitors are dumping. This is precisely the most effective way to deal with the situation. It is enough that an entrepreneur suspects a competitor of unfair practices to be able to notify the OCC and count on an investigation. Of course, the stronger the grounds for notification, the better. So how to prepare for notification?
Document instances of underpricing
Wanting to report dumping to the authority, you need to have some kind of sticking point for inspectors. In this case, documented and verifiable instances of price undercutting will work best. If you see your competitors engaging in unfair practices, gather evidence with which you will then go to the OCCP.
Build competitiveness with more than just price
Win customers with the quality of your services, build an image as an expert (and be one), offer additional services, a wider range of warranty repairs. Opportunities abound, and each of them can make your business less susceptible to dumping.
Diversify revenue sources
If your range of services or assortment is particularly narrow (for example, you only sell bicycles and bicycle accessories), your business may fall prey to dumping companies more easily. Try to expand your offerings, and thus your pool of potential customers.
Dumping – examples
Following the market, we can easily observe examples of price dumping, used most often – and how! – by the largest players in the market.
Uber
A few years ago, the unfair practices of Uber were loudly discussed. The application, which allows ordering passenger transportation (thus, not a carrier, but an intermediary), set itself the goal of eliminating (or at least marginalizing) traditional cab services, offering rides at extremely low prices. Promotions, organized with great frequency, meant that users did not have to think long – the use of cab drivers simply ceased to be worthwhile.
Unfortunately, the lessons from this example seriously undermine faith in the effectiveness of anti-dumping laws. Although the possibility of Uber’s dumping has been talked about since at least 2017, and the company has been recording losses of hundreds of millions of dollars for several years, it has been successfully operating to this day, finally coming out ahead for the past two to three years. So you can see that Uber’s strategy… just worked.
The discussion on the use of dumping in this case is still ongoing. For example, in Germany, where – in the city of Essen – there are plans to introduce a minimum price for transportation services. This decision has been protested, as you might guess, by Uber itself. The situation remains unresolved.
Sources: Mises Institute and Taxi Heute (DE).
Arriva
In 2012, Arriva Bus Transport was a local (operating in the Warmian-Masurian Voivodeship) monopolist in passenger transportation. When a competing carrier began its operations and offered lower fares, Arriva used typical dumping – it lowered prices even further – below the cost of providing services. And it didn’t stop there – the company increased the volume of courses in areas served by the competition and modified the schedule of trips so that Arriva’s vehicles appeared at bus stops a few minutes before the competitor’s buses.
This strategy also succeeded – temporarily. The competition did not stand up to the race, and as soon as this happened, Arriva Bus Transport reacted in a way that could be predicted – it immediately raised prices.
The finale of this case was a fine imposed on the company by the OCCP. Arriva had to pay PLN 76,000.
Source: transport-public.co.uk
Chinese electric bicycles
Chinese electric bicycle manufacturers have been generously subsidized by their state for many years. As a result, they could afford to significantly reduce the prices of their final products, especially those destined for foreign markets, including Europe. The European Bicycle Manufacturers Association (EBMA) reacted to the situation and reported the matter to the European Commission.
The complaint had an effect – high anti-dumping duties ranging from 10.3% to as much as 70.1% were imposed on Chinese manufacturers!
Lower anti-dumping duty rates applied to companies that began cooperating with EU authorities after the first information was received.
Effects of dumping
The long-term effects of dumping can be lamentable – and actually for everyone. Competitors, consumers and the economy suffer from dumping. Finally – if everything ends happily – also the company that is dumping.
First, the competition loses
The first, obvious victim of dumping is usually the competition. It is they who will be the first to feel the effects of unfair practices. A company that undercuts prices starts by “chasing” its rival out of the market and taking away its customers. However, let’s point out that this is specifically a situation in which a company offers services or products at prices lower than they were produced. This deprives competitors of the opportunity to respond to the situation in a manner consistent with the rules of the market.
Example:
Company A provides renovation and construction services. When Company B appears on the local market, offering higher quality work, more modern designs and lower prices, Company A reacts by dumping. Using the advantage it has developed over the years, it lowers the price of its services by 60%, practically knocking the competition’s arguments out of hand right from the start.
Company B is not in a position to put up a fight, as it is just starting to operate in a given market. Wanting to outbid its competitor, Company B would have to take out loans or stop paying employees, which is not an option. In this situation, Company B withdraws from the market. Company A returns to the leading position and immediately turns off promotions, offering its services at prices similar to or even higher than before the market rival appeared.
Customers lose out next
Consumers are the second to suffer. Continuing the theme from the previous example – at first it may seem that customers are winning in this war. For a limited time, they can use Company A’s services at significantly reduced prices. However, the local eldorado quickly comes to an end – when Company A gets rid of the competition, it immediately makes its customers feel it.
Prices are rising, and with them the confidence of the monopolist. This can (though in theory it doesn’t have to) result in a reduction in the quality of service provided. Convinced of its unshakable position, Company A simply has no interest in trying. It knows that there is no competition in the area, and if any does appear, it will simply repeat the pattern – unless Company B reacts and reports the situation to the OCCP.
Finally, the economy is losing
The collapse of smaller companies, lack of competitiveness, layoffs (and therefore increased unemployment), lack of incentives to invest in a region – these are all effects that dumping can cause. Although the example we are using is specific, because it involves a small market and a narrow range of activities, it is easy to translate the potential effects of dumping to a broader scale.
In the end, it loses the dumper
Price dumping does not go unanswered. Both domestic and foreign authorities respond to unfair practices. Dumping companies are fined and anti-dumping duties are imposed. But are the sanctions and consequences effective? This is still the subject of heated discussions – the resolution, after all, often comes long after the competition has been eliminated from the market.
