Cost Justification for Wholesale Price Discrimination

ABSTRACT While the Robinson‐Patman Act prohibits price discrimination in wholesale markets, it allows for a cost justification. In a model where an upstream seller incurs different costs to serve downstream buyers, we show that setting differential wholesale prices consistently raises social welfare relative to uniform pricing. Even when total output decreases, efficiency gains from improved production allocation outweigh the resulting loss in consumer surplus. These findings contrast with price discrimination based on demand‐side production efficiency. In a more general setting with price differentials driven by both cost and demand factors, we identify conditions under which wholesale price discrimination improves welfare, depending on the relative magnitudes of cost and efficiency variation, their covariance, and the curvature of final demand. Our analysis underscores the importance of distinguishing the underlying sources of price differentials in antitrust enforcement under the Act.