Quantity Restrictions and Endogenous Quality Choice

In a vertical product differentiation model under Cournot competition both foreign and domestic firms respond by lowering their investment in long-run quality for a quantity restriction at, and in the neighborhood of, the free trade import level. Average quality increases only when the low-quality foreign firm faces a substantially restrictive quota/voluntary export restraint. The change in quality depends on whether the foreign firm is of high or low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long-run choice of quality.The paper was written when Herguera and Petrakis were at the Universidad Carlos III. Thanks are also due to all the participants at the CEPR ERWIT conference at Rome in September 1994, and the participants at the IX Simposio de Analisis Econo´mico (1994) at the Universidad Autonoma, Barcelona. Two referees and especially the editor provided very helpful comments. Herguera acknowledges support from DGICYT No. PB93-235. Kujal and Petrakis acknowledge support from DGICYT No. PB95-287.Publicad