This paper investigates a model of endogenous product differentiation between large well established and small newly established firms. Small firms should have greater growth potential than large mature firms whose growth potential tapers off once they reach a certain size relative to the capacity of the market. The small firm with its newness has a product that is typically seen as being of a lower quality than the products of their larger counterparts. The model explores the interaction of product quality, firm size and the growth of small firms. This paper shows that firms choose size (large or small) and they will maintain their decision throughout any stage of the game. Large firms are more efficient at producing quality, therefore, despite a growth rate advantage, small firms remain small. Driving this result is the fact that the payoff from remaining small outweighs the payoff from its growth potential since becoming large is accompanied by heavy costs. This property ensures that the principle of maximal product differentiation is sustained. Models that investigate firm dynamics have predicted that small firms grow at a faster rate than large ones. Hall (1987) investigated the dynamics of firm growth in the US Manufacturing sector using econometric techniques. He suggested that possible reasons why small firms may grow faster than large ones are due to differences in the rate and direction of innovative activity, or simply because the economy is finite and it is expected that diminishing returns will eventually take effect. He observed large differences in the variance of growth rates across size classes of firms and that the smaller firms in the sample grow faster, but made no claim to be able to distinguish clearly the reasons for these differences. This paper investigates, firm size and their respective growth rates under variable marginal cost. Our analysis presents a two-stage non-cooperative game, in which the firm chooses its size in stage one and prices given its own type and that of the other firm in stage two. Shaked and Sutton (1983) showed that where two firms choose distinct qualities, they will both enjoy positive profit at equilibrium. The intuition behind their result is that where the product qualities converge, a price competition will result between both firms which will serve to erode their profits. This equilibrium runs counter to the wisdom of Hotelling's (1929) model of the linear city in which he concluded that the equilibrium outcome is characterized by minimal differentiation. In applying the wisdom of Shaked and Sutton we consider two firms of distinctive types; small and large. It is believed that small newly established firms should have greater growth potential than large mature firms whose growth potential tapers off once they reach a certain size relative to the capacity of the market. However, it has been argued that due to the product differentiation advantage that the large well established firm has and the demand disadvantage that may face the small firm it might be difficult for the small firm with the lower quality to settle in the market. Schmalensee (1982) reported that, once consumers are convinced that the first in any product class performs satisfactorily, that brand is seen as the standard against which subsequent entrants are judged. As a result, it presents a greater challenge for later entrants to attract consumers to invest in learning about their qualities than that faced by the first brand.The idea that there is product differentiation advantage for established sellers has been well supported by empirical investigations.