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.

In a vertically differentiated industry a domestic and a foreign firm first choose the quality of their goods and then compete in quantities, or prices, in the home market. We investigate the cases in which a tariff is chosen before, or after, the firms' quality decision. These cases are referred to as the ex-ante and the ex-post game, respectively. Optimal ex-post tariffs are positive and ensure that the domestic firm always produces the high quality good. The optimal ex-ante tariff is prohibitive and welfare under domestic monopoly is lower than under ex-post tariffs, unless firms compete in prices and the domestic firm is high quality.

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