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Abstract We study the welfare effects of input price discrimination when an upstream firm that supplies two cost-asymmetric downstream firms undertakes R&D investments. With observable two-part tariffs, banning discrimination always decreases R&D levels and long-run welfare. Under unobservable two-part tariffs, banning discrimination may increase or decrease R&D levels—depending on the degree of downstream cost-asymmetry; but it always decreases long-run welfare. Thus, with unobservable two-part tariffs, a ban on input price discrimination is detrimental to welfare even when its effect on upstream R&D investments is positive.