How to Compete? Cournot versus Bertrand in a Vertical Structure with an Integrated Input Supplier

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) show that Bertrand competition is more profitable than Cournot competition, which contrasts with conventional wisdom. In this article, 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 may lead each firm to choose a quantity contract and, as long as products are sufficiently differentiated, entails conflicting choices causing nonexistence 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.