This paper explores the implications of the quality of intermediate goods in an endogenous growth model. We show that a trade‐off exists between the quality and the variety of products, which creates a wedge between the market‐equilibrium quality and the socially optimal quality. Relative to the social optimum, the equilibrium quality could be either under‐supplied or over‐supplied, depending on the productivity‐enhancing effect as well as the increasing returns to production specialisation and business‐stealing effects.