Legal Definitions - cost justification

Cost justification is a legal defense used by sellers against charges of price discrimination under the Robinson-Patman Act. This defense requires the seller to prove that they incur lower costs in serving customers who are paying less.

A manufacturer sells a product to two different retailers at different prices. Retailer A buys a larger quantity of the product and receives a lower price per unit than Retailer B, who buys a smaller quantity. If Retailer B accuses the manufacturer of price discrimination, the manufacturer can use cost justification as a defense by showing that it costs less to produce and distribute the larger quantity sold to Retailer A.

Another example could be a service provider offering a discount to a customer who signs a long-term contract. The provider can use cost justification as a defense by showing that it costs less to provide services to a customer who commits to a longer-term contract.

These examples illustrate how cost justification can be used to defend against charges of price discrimination by showing that the seller incurs lower costs in serving certain customers.