1. Determining the Legality
Loss leaders in product pricing is banned under the “General Sales Below-Cost (SBC)Laws," in twenty-two U.S. states, namely: Arkansas, California, Colorado, Idaho, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming,
Generally, SBC laws consider the said pricing method as “predatory," since the companies that usually adopt this practice are those that are dominant in the territory in which they operate. They have the capacity to maintain lower than market or cost prices over a period that is usually long enough to drive away or prevent competitors from entering or penetrating the trade arena.
Once they achieve such goals, the dominant firm will raise the prices. Primarily, the aim is to recoup the previous losses, and then to reap higher profits from the next round of price elevation. This strategy presents detriments to the consumers, because the latter have no other options available.
However, such SBC laws were enacted during the 1930s through the early 1940s in conjunction with the Antitrust Laws. The latter was developed and enacted to ensure that fair trade practices will prevail in the American market economy.
Criticisms against the Sales-Below-Cost Laws
Many contend that the statutory SBC laws are archaic as these were instituted at a time when holding companies controlled most producers and mid-level suppliers.
Prior to the Antitrust Laws, the holding companies protected their investors’ ROI (returns on investment) by investing in interrelated businesses. This allowed them to control and manipulate prices in such a way to drive away new and independent market players.
In between the years 1970 to 1999, most of the old SBC laws in the twenty-two states were amended. The advent of Walmart and the cases filed against the “big-box" store during those years spurred some of the changes.