Because of the absence of correspondent institutional stipulation,the decentralized economic reform makes China benefited,and results in local protection and market segmentation as well.The formation mechanism of local protection and market segmentation mainly results from the interaction of local government.Local protection can be further decomposed into reasonable protection and unreasonable protection,and market segmentation can be decomposed into segmentation from local protection and "natural market segmentation".Our policy suggestion on how to eliminate unreasonable local protection is to practise fiscal transfer to poor regions and reform the present judicial system.In addition,local government should completely exit from the competitive industries.