Dual Pricing

Dual pricing is a system in which the same good or service is sold at two different prices, or in which two different prices coexist for related transactions. The term is used in several contexts, including international trade, foreign exchange, and the pricing of public services.

Forms

In international trade, dual pricing refers to the practice of charging different prices in domestic and foreign markets. This can take the form of dumping, in which goods are sold abroad at prices below those charged at home, or of the reverse, in which domestic prices are held below world prices.

In foreign exchange, dual pricing refers to the coexistence of an official exchange rate and a market rate. The official rate applies to certain transactions, while the market rate applies to others. The difference between the two rates creates a premium for those with access to the official rate.

In public services, dual pricing refers to the practice of charging different prices to different categories of users, for example residents and non-residents, or commercial and household users.

Causes

The causes of dual pricing vary by context. In trade, it can arise from market power, when a firm with market power segments markets and charges different prices according to the elasticity of demand in each. It can also arise from government policy, when subsidies or taxes drive a wedge between domestic and foreign prices.

In foreign exchange, dual pricing arises from the attempt to manage the exchange rate while allowing some transactions to take place at a market rate. It reflects the tension between the objectives of the authorities and the pressures of the market.

In public services, dual pricing reflects the attempt to reconcile the objectives of affordability, for some users, with the recovery of costs, from others.

Consequences

Dual pricing has consequences for the allocation of resources and for welfare. In trade, it can distort the pattern of trade and can harm consumers in the high-price market. It can also invite retaliation from trading partners, who may impose anti-dumping duties.

In foreign exchange, dual pricing can create rents and can encourage arbitrage and rent-seeking. It can divert resources to activities that capture the premium rather than to productive uses. It can also undermine the credibility of the exchange rate regime.

In public services, dual pricing can achieve distributional objectives, by charging less to those with lower ability to pay, but it can also distort consumption and can be difficult to administer.

Policy

Policy responses to dual pricing depend on the context. In trade, the response may be to challenge the practice through the dispute settlement system, or to impose countervailing duties. In foreign exchange, the response may be to unify the exchange rate, to remove the distortion.

The design of policy must weigh the objectives that dual pricing serves against the costs that it imposes. Where the objectives are distributional, targeted transfers may be more efficient than price discrimination. Where the objectives are to manage the exchange rate, a unified rate with other instruments may be preferable.

Multiple Exchange Rates

Multiple exchange rate systems have been used by many countries, particularly during balance of payments crises. Under such systems, the authorities set different rates for different transactions, with an official rate applied to essential imports and to certain exports, and a market rate applied to other transactions.

The rationale is to protect essential imports from the effects of devaluation and to limit the fiscal cost of subsidies. The system creates rents for those with access to the favourable rate, and it encourages rent-seeking and arbitrage.

Multiple exchange rates are generally transitional arrangements, since they distort the allocation of resources and are difficult to administer. The transition to a unified rate is often accompanied by the liberalisation of trade and of capital flows, and it can require the removal of subsidies and the reform of the exchange rate regime.

Dumping and Trade Remedies

Dumping, in which goods are sold in a foreign market at a price below that charged in the domestic market or below cost, is a form of dual pricing that is subject to international rules. The rules permit importing countries to impose anti-dumping duties when they find that dumping has occurred and that it has caused injury to domestic industry.

The determination of dumping involves a comparison of the export price with the normal value, which is the price in the domestic market or a constructed value. The comparison raises methodological issues, particularly when the domestic market is not competitive or when the goods are not sold in the domestic market.

The use of anti-dumping measures has grown, and they are now a common instrument of trade policy. Their use is contentious, since they can be employed to protect domestic producers from legitimate competition as well as to address genuine dumping.

Dual Pricing in Public Services

Dual pricing is used in the provision of public services, where different categories of users are charged different prices. Residents may be charged less than non-residents, and households less than commercial users, reflecting the objectives of affordability and of cost recovery.

The design of such schemes must balance the objectives. Charging non-residents more can raise revenue from those who benefit from the service without contributing to its cost through taxation. Charging commercial users more can reflect the higher value they derive from the service.

The administration of dual pricing can be complex, and it can create incentives for evasion and for arbitrage. The schemes must therefore be designed with attention to the practicalities of enforcement and to the fairness of the resulting distribution of costs.

Summary

Dual pricing takes different forms in international trade, foreign exchange, and public services, and it reflects a range of objectives and constraints. Its consequences for the allocation of resources and for welfare, and the policy responses to it, depend on the context.

See also

• Trade Policy
• Foreign Exchange Market
• Export Tax