Enforcing Domestic Quality Dominance through Quotas*

Abstract

We study duopoly competition between a domestic and a foreign firm who first choose their quality and then compete in prices in the domestic market. As is well known, the free-trade equilibrium exhibits quality differentiation and indeterminacy of the quality leader. We show that an import quota can enforce, as the unique subgame-perfect equilibrium outcome, the quality ranking that favors the domestic producer and thereby can increase domestic welfare. Copyright Blackwell Publishing Ltd 2005.