Final answer:
Dumping involves selling goods below production costs or market value in a foreign market. It can be seen as either predatory pricing, with the intent to monopolize, or a result of natural market forces where demand and supply determine prices.
Step-by-step explanation:
The practice of selling goods in a foreign market at below their costs of production or at below their "fair" market value is known as dumping. There are two explanations for why dumping might occur. One is the sinister explanation that views dumping as part of a predatory pricing strategy, where foreign firms intentionally set low prices to drive out domestic competition before raising prices to monopoly levels. This strategy is harmful to the domestic market as it ultimately leads to higher prices and reduced competition.
On the other hand, an innocent explanation of dumping suggests that it is the result of market forces where demand and supply determine the market prices. Shifts in supply or demand could result in market prices falling below the cost of production. This may happen with excess supply of goods like steel, computer chips, or machine tools, reflecting not a deliberate strategy but rather the market at work in its natural dynamic state.
When domestic firms face such low-priced imports, they might be forced to sell at a loss to remain competitive. If unable to sustain these losses, they may exit the market, enabling importers to eventually raise prices. This dynamic underscores the complexity of international trade and the factors influencing market pricing.