Cournot vs. Bertrand under relative performance delegation: Implications of positive and negative network externalities

Abstract

This paper demonstrates that relative-performance based strategic managerial delegation does not lead to the equivalence of Bertrand and Cournot equilibria in the presence of network externalities, regardless of the strength and type of network externalities — positive or negative. In the presence of positive network externalities, under relative-performance based delegation, Bertrand competition yields lower prices and profits, and higher quantities, consumers surplus and welfare than Cournot competition. On the contrary, these rankings are completely reversed in the presence of negative network externalities. It also discusses the endogenous choice of price or quantity contract under delegation in the presence of network externalities.