Endogenous Vertical Contracts and the Mode of Competition Chrysovalantou Milliou, Emmanuel Petrakis, Sabina Sachtachtinskagia, Nikolaos Vettas ∗ June 2008 PRELIMINARY VERSION Abstract We examine how vertically related firms choose to trade. That is, we endogenize their contract types and terms. In a setting with two vertical chains, differentiated products and downstream competition in prices, we demonstrate that the contract types can affect significantly the mode of competition. We also demonstrate that price-quantity bundle contracts, which specify the input quantity and its total price, prevail in equilibrium. This occurs mainly because such contracts transform the downstream competition from Bertrand to Cournot. JEL Classification: L42; L22; L14; L13; L81 ∗ Milliou: Department of International and European Economic Studies, Athens University of Economics and Business, Athens 10434, Greece, and CESifo, Germany, e-mail: cmilliou@aueb.gr; Petrakis: Department of Economics, University of Crete, Rethymnon 74100, Greece, e-mail: petrakis@ermis.soc.uoc.gr; Sachtachtin- skayia: Department of Economics, Athens University of Economics and Business, Athens 10434, Greece, e-mail: sabina@aueb.gr; Vettas: Department of Economics, Athens University of Economics and Business, Athens 10434, Greece, and CEPR, UK, e-mail: nvettas@aueb.gr. Full responsibility for all shortcomings is ours.