How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier

Luciano Fanti and Marcella Scrimitore

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: We study whether a quantity or a price contract is chosen at equilibrium by one integrated firm and its retail competitor in a differentiated duopoly. Using a similar vertical structure, Arya et al. (2008) showed that Bertrand competition is more profitable than Cournot competition, which contrasts with conventional wisdom. In this paper, we first demonstrate that such a result is robust to the endogenous determination of the type of contract. Second, by introducing managerial incentives in the model, we find that delegation to managers entails conflicting choices of the strategic variable by the two firms as long as products are sufficiently differentiated, causing non-existence of equilibrium in pure strategies. Significantly high product substitutability reconciles firms' objectives under delegation, leading unique or multiple equilibria with symmetric types of contracts to arise.

Keywords: Upstream monopolist; outsourcing; price competition; quantity competition; managerial delegation. (search for similar items in EconPapers)
JEL-codes: D43 L13 L21 (search for similar items in EconPapers)
Date: 2017-01-01
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
Note: ISSN 2039-1854
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Persistent link: https://EconPapers.repec.org/RePEc:pie:dsedps:2017/221

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