Quality Bargaining and Intermediate Goods Protection*

This paper offers an explanation for the proposition that removing protection from a firm can induce an improvement in product quality. In a vertically separated industry the quality of the final good is dependent on the quality of the intermediate goods used in its production. This model is used to consider removal of protection from the upstream firm (the supplier) which gives the downstream firm (the assembler) greater bargaining power since the option of turning to a foreign supplier becomes more attractive.