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 fre e trade import level. Average quality increases only when the low-quality f oreign firm faces a substantially restrictive quota/voluntary export restra int. The change in quality depends on whether the foreign firm is of high o r low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long-run choic e of quality. (C) 2000 Elsevier Science B.V. All rights reserved.