Effects of Liberalization on Domestic Product Quality

Effects of Liberalization on Domestic Product Quality

In a model of vertical product differentiation we study the impact of liberalization on the choice of the product quality of a local monopolist. We show that under liberalization as one foreign firm enters with a superior quality, the local firm will reduce its quality level unless the foreign firm`s product quality is sufficiently higher. As the efficiency of the local firm goes up, its quality choice responds more under liberalization than under protection. However, its market size in the protective regime is independent of its efficiency level.