Abstract
This paper examines whether firms prefer to choose prices or quantities
with a manufacturing duopoly in which each upstream firm sells its product to its
own downstream firm. The degree of product differentiation plays an important role
in whether firms set prices or quantities. We show that price competition performs
better than quantity competition, from the upstream and downstream firms’ point of
view, regardless of the product differentiation. We also show that pay-offs are larger in
Bertrand (price) competition than in Cournot (quantitiy) competition if both products
are differentiated to a certain extent.
