Ban on input price discrimination harms innovation and welfare, study finds.
The article explores how banning input price discrimination affects R&D investments in a scenario where an upstream supplier works with two downstream firms with different costs. The researchers found that when downstream costs are similar, banning price discrimination leads to higher R&D investments. However, when downstream costs are different, banning price discrimination results in lower R&D investments. Despite this, overall welfare decreases after banning price discrimination. Therefore, allowing input price discrimination is better than prohibiting it, even if it reduces the upstream supplier's motivation to cut costs.