The effect of trade quotas on firms' incentive to invest in cost-reducing R&D is studied in a two-stage price-setting duopoly game. A domestic and foreign firm first choose R&D levels and then set the prices of their differentiated products in the domestic market. With a quota imposed at, or...

In this paper we show that in a vertically product differentiation model where foreign and domestic firms compete in quantities, both firms respond by lowering their qualities for a restriction at, or close to, the free trade level. Both firms lower qualities, raise prices and earn higher...