This article theoretically analyzes the interactions between formal and informal firms in a vertically differentiated duopoly in which a regulatory authority intervenes to control the compliance of the firms to the law. In our simple framework, it turns out that it is never optimal to deter completely the informal firm from entering the market. This is mainly due to a production expansion effect and to an increased price competition, which increase the consumers' surplus. Moreover, it appears that a complete 'laissez-faire' policy is never optimal.