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In a model of vertical product differentiation we study the impact ofliberalization on the choice of the product quality of a local monopolist. We showthat under liberalization as one foreign firm enters with a superior quality, thelocal firm will reduce its quality level unless the foreign firm’s product quality issufficiently higher. As the efficiency of the local firm goes up, its quality choiceresponds more under liberalization than under protection. However, its marketsize in the protective regime is independent of its efficiency level.JEL classification: L11, O12