We study how the removal of size-based industrial protection affects competition and consumer welfare in differentiated product markets. Using the phased dismantling of India’s Small Scale Industries (SSI) product reservation policy between 2000 and 2007, we examine how increased competition influenced product quality, prices, variety, and welfare. Exploiting product-level variation in the timing of dereservation, we implement a staggered difference-in-differences design using firm-product data from the Annual Survey of Industries. We find that dereservation induced significant quality upgrading, particularly among larger and more productive firms, alongside increases in capital and skill intensity. Product variety expanded through entry into previously reserved markets. While average prices did not decline, quality-adjusted prices fell significantly, indicating improved consumer value. Firms in industries with greater scope for differentiation competed through quality upgrading, whereas those in industries with limited differentiation competed through lower prices. Welfare decomposition shows substantial gains, driven primarily by higher quality and expanded variety rather than lower prices. These findings highlight how removing size-based distortions reshapes competition and generates consumer welfare gains in differentiated product markets.