Ok I found the problem, and a workaround:
The problem was that my msi project was a Basic MSI Project, as opposed to InstallScript and InstallScript MSI projects. This kind of project does not support reading a response file (aka setup.iss). However, there is a way to perform silent installation for the .msi / setup.exe file:
Setup.exe /s /v"/qn"
will do the trick.
All of this information can be found here