Price discrimination and sequential contracting in monopolistic input markets

•We study a vertically related market with one supplier and two downstream retailers.•The supplier prefers to contract sequentially to manipulate the retailers' demand.•It strategically contracts with an efficient retailer first and the other later.•Allowing price discrimination improves welfare in the sequential contracting game.

This paper examines the welfare implication of banning price discrimination in the intermediate goods market in which a monopolistic supplier contracts with asymmetric downstream retailers. We demonstrate that the supplier has a strong incentive to manipulate the interdependent demand structure through sequential contracting whether price discrimination is banned or not, and allowing price discrimination improves social welfare and consumer surplus when sequential contracting is implemented by the supplier.