[THE VIEW]'Below-Cost Sales Law' Prohibition

To Protect Small Business Owners and Ensure Fair Competition
The U.S. and Europe Institutionalize Bans on Loss-Leader Products
Controversy Over Whether "It Ultimately Harms Consumers"

There are laws unfamiliar to us that are common in the United States and Europe. One of these is the 'Below-Cost Sales Law.' As the name suggests, it is a law that prohibits setting the selling price lower than the wholesale purchase price and associated operating costs. For example, if a supermarket buys a pack of milk at a wholesale price of 500 won and the combined transportation, tax, and operating costs amount to 100 won, the supermarket cannot set the consumer selling price below 600 won. With such a law, companies are prevented from selling so-called loss-leader products. This law is enforced in more than half of the U.S. states, as well as in Belgium, France, Germany, and other countries.

This law is based on a very old economic theory. Large companies have enough liquidity to endure losses for a certain period in the market, and even if not, they can offset losses through other businesses or products. However, small business owners do not have this advantage. Therefore, if large companies start selling loss-leader products, small business owners cannot sustain price competition and are forced out of the market. This reduces market competition, allowing large companies to use their monopoly power to set prices much higher. Since consumers have to pay these higher prices, it ultimately harms consumer welfare.

However, the U.S. Federal Trade Commission (FTC) holds the position that this law can actually harm consumers. The FTC believes that cases where companies sell loss-leader products to drive out small businesses and secure monopoly power are rare. Moreover, because companies cannot set prices low under the 'Below-Cost Sales Law,' consumers lose the opportunity to purchase products at cheaper prices immediately, which is detrimental to consumers.

In the field of economics, there is still limited research on whether this law benefits or harms consumers. However, recent studies suggest that the FTC's view is more credible. In the U.S., the product most frequently subject to the 'Below-Cost Sales Law' is automobile fuel. Large retailers like Walmart and Costco sometimes install gas stations and use fuel as a loss-leader product. The U.S. Convenience Store and Petroleum Marketers Association argues that small and medium-sized gas stations should be protected through the 'Below-Cost Sales Law.' However, research shows that small and medium-sized gas stations engage in loss-leading more often than large retailers.

South Korea does not have a 'Below-Cost Sales Law.' So, what regulations are in place to protect small and medium-sized gas stations and small business owners from large retailers that can use aggressive pricing strategies with loss-leader products? Although there is no uniform law prohibiting the use of loss-leader products, regulations are enforced on a case-by-case basis by restricting business permits. For example, supermarkets are rarely granted permission to operate gas stations. E-Mart is the only large retailer that owns gas stations, and even this faced strong opposition from local commercial districts. Costco has repeatedly applied for permission to install gas stations but has been consistently denied.

Seo Boyoung, Professor at Indiana State University, USA