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

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  • Luciano Fanti
  • Marcella Scrimitore

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. () 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.

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  • Luciano Fanti & Marcella Scrimitore, 2019. "How to Compete? Cournot versus Bertrand in a Vertical Structure with an Integrated Input Supplier," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 796-820, January.
    • Handle: RePEc:wly:soecon:v:85:y:2019:i:3:p:796-820
    DOI: 10.1002/soej.12324
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    Cited by:

    1. Yuta Kittaka & Noriaki Matsushima & Fuyuki Saruta, 2021. "Competition between physical and electronic content retailers," ISER Discussion Paper 1123, Institute of Social and Economic Research, Osaka University.
    2. Habiger, Peter & Kopel, Michael, 2020. "Strategic delegation in successive oligopolies with differentiated firms," Economics Letters, Elsevier, vol. 194(C).
    3. Luciano Fanti & Domenico Buccella & Luca Gori, 2023. "R&D subsidies in a duopoly market with outsourcing to the rival firm," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 100-110, January.
    4. Yasuhiro Arai & Noriaki Matsushima, 2023. "The impacts of suppliers and mutual outsourcing on organizational forms," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 114-132, February.
    5. Nicola Meccheri, 2021. "Biased managers in vertically related markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 724-736, April.
    6. Nicola Meccheri, 2019. "Biased managers in a vertical structure," Working Paper series 19-12, Rimini Centre for Economic Analysis.
    7. Kittaka, Yuta & Matsushima, Noriaki & Saruta, Fuyuki, 2022. "Negative effect of price-matching policy on traditional retailers in a dual-channel supply chain with different content formats," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 161(C).
    8. Hong-Ren Din & Chia-Hung Sun, 2023. "Centralized or decentralized bargaining in a vertically-related market with endogenous price/quantity choices," Journal of Economics, Springer, vol. 138(1), pages 73-94, January.

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