From: thf2@ellis.uchicago.edu (Ted Frank)
Subject: Re: "Dumping"
Reply-To: thf2@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Distribution: na
Date: Fri, 11 Dec 1992 17:27:05 GMT

In article <Bz3Mo9.7t6@apollo.hp.com> nelson_p@apollo.hp.com (Peter Nelson) writes:
>>American Airlines doesn't fit the definition because they aren't charging
>>below marginal cost.  They're not taking a loss deliberately, they're
>>confronted with a situation where they *have* to take a loss, and they're
>>making the best of a bad situation.
>
>   What they *have* to do is up to their management and board of
>   directors.  They're making a business decision.   They could 
>   decide to sacrifice market share, get out of some markets al-
>   together, liquidate the company, offer some level of service
>   that would justify higher prices, etc, etc.    

And they're making the decision that maximizes *today's* profits
(or, in this case, minimizes losses).  They have to pay the service
on their debt and the obligations on their contracts whether or not 
they fly a single plane.

>In this sense 
>   it's no different than if Panasonic decided to sell TV's in
>   New York for half the price they sell them for in Tokyo.

But that isn't the issue we're talking about.  The accusation was
made that Panasonic is selling below cost in New York, demonstrated by
the fact that they're selling at a higher price in Tokyo.  If Panasonic
were indeed selling below cost, they would be dumping.  The debate is
whether a lower price necessarily means dumping, when it could just
be indicative that Panasonic is selling at a competitive at-cost price
in New York, while selling at a monopoly price in Tokyo.  In such a
situation, there isn't dumping, and any gain in market share Panasonic
gets in New York is because they're a more efficient producer, rather
than because of "unfair sales tactics."  The other debate is whether
this ever actually happens.

The difference is that Panasonic, if it is selling televisions below
cost in New York, is not only losing money, but is failing to profit
maximize.  American Airlines is losing money, but it doesn't have a
choice -- it's going to lose money whatever it does, so it's profit
maximizing by selling tickets at $90 and trying to fill their planes.
There's not a single price AA can charge that will allow them to make
more money, hypothetically.  They could try to raise their prices to
$500, but they're still faced with the same fixed costs, only slightly
lower variable costs, and now with a tenth as many passengers.  

>   The bottom line is AMR is taking a loss today; they're gaining
>   market share; they will presumably have higher profits in the 
>   future.  These are the criteria that were set down here for
>   "dumping".   Losses, market share, profits, are all objective
>   facts.   Motives and strategies are matters of opinion.   

The criterion for dumping wasn't "lossses", it was "losses on
additional sales," the selling of a product or service below marginal 
cost.  AMR doesn't meet this criterion.  People have been sloppy
in saying "losses" instead of "losses on marginal sales", but though the
former is *necessary* for dumping, it isn't *sufficient*.  It's the
losses on marginal sales that is dumping.

The cost to American Airlines of flying an additional passenger is
less than the cost of the ticket.  Therefore, they're making a profit
on each ticket sold, even though they're not covering their fixed
costs.  Thus, though they're losing money, they're also maximizing
today's profits, and they're not selling below cost, and therefore
they're not dumping, by definition.
-- 
ted frank                     | thf2@ellis.uchicago.edu 
standard disclaimers          | void where prohibited
the university of chicago law school, chicago, illinois 60637
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