two countries just established a free-trade agreement. The CEO of a ultra high-quality competition bicycle manufacturer notices that there is only one other firm in the country that manufacturers competition-ready bicycles. His firm prices its bicycles below the cost of production of the other firm, driving the other firm out of business. The CEO then raises the price of his bicycles now that there is no competition. Classify the situation described
A) this situation represents a bilateral trade agreement.
B) this situation represents dumping
C) this situation is an example of an infant industries argument
D) this situation is an example of a tariff
This situation represents dumping
B) this situation represents dumping
B) this situation represents dumping.
Explanation:
Dumping refers to a situation where a company sells its products in a foreign market at a price below the cost of production or below the price it charges in its domestic market. In the given scenario, the CEO of the ultra high-quality competition bicycle manufacturer is deliberately pricing their bicycles below the cost of production of the other firm in order to drive them out of business. Once the competition is eliminated, the CEO then raises the price of their bicycles since there is no longer any competition. This practice of undercutting prices to eliminate competition and then raising prices is an example of dumping.