Legal Definitions - cost justification

Cost justification is a legal defense used by a seller when accused of charging different prices to different buyers for the same product. Under a law known as the Robinson-Patman Act, sellers are generally prohibited from engaging in price discrimination. However, a seller can use "cost justification" to argue that any price difference is not unfair discrimination but rather a reflection of genuine savings in the cost of manufacturing, selling, or delivering goods to the customer who received the lower price. Essentially, if it truly costs less for the seller to do business with one customer compared to another, they can legally pass those savings on through a lower price.

• Example 1: Bulk Manufacturing and Shipping Efficiency

  A large electronics manufacturer sells its latest smartphone model to a national retail chain at a significantly lower per-unit price than it offers to a small, independent electronics store. The national chain places orders for hundreds of thousands of units at a time, while the independent store orders only a few dozen.

  The manufacturer can use cost justification if it can demonstrate that producing and shipping such a massive volume to the national retailer's few central distribution centers is substantially cheaper per unit. This could be due to economies of scale in manufacturing (e.g., longer production runs, lower setup costs per unit), reduced administrative costs for processing one huge order versus many small ones, and more efficient, full-truckload shipping directly to fewer locations, rather than numerous smaller, less efficient deliveries to individual small stores.

• Example 2: Streamlined Logistics and Reduced Service Requirements

  A commercial cleaning supply company offers a lower price per gallon for a specific industrial cleaner to a large corporate client that provides its own empty containers for refilling, picks up the product directly from the supplier's warehouse, and pays invoices electronically within 24 hours. In contrast, a smaller client requiring the supplier to provide pre-filled containers, deliver the product, and offering 30-day payment terms pays a higher per-gallon rate.

  The cleaning supply company can argue cost justification because the corporate client's streamlined process significantly reduces the supplier's expenses related to packaging materials, delivery logistics, and accounts receivable management (due to immediate payment). These tangible cost savings directly justify the lower price offered to the corporate client.

• Example 3: Customized Production and Material Sourcing

  A specialized textile mill sells a particular fabric to a major fashion house at a lower price per yard than it sells to a boutique clothing designer. The fashion house orders millions of yards of a standard, un-dyed fabric directly from the mill's production line, using its own dyes and finishing processes. The boutique designer, however, requires smaller quantities of custom-dyed fabric, often requesting specific blends and finishes that necessitate unique production runs and specialized handling.

  The textile mill can employ cost justification by showing that the large, standardized order from the fashion house involves significantly lower costs per yard. This is because it avoids the expenses associated with custom dyeing, smaller batch production, and specialized finishing processes required for the boutique designer. The fashion house's requirements allow for simpler, more efficient manufacturing and delivery, directly reducing the mill's per-yard cost.