By assuming a triangular distribution of consumers' willingness to pay for quality, this paper makes use of the stylized fact that low-income households are more numerous than highincome households, and thus, income distributions are right-skewed. Accordingly, we present a straightforward two-firm, two-stage vertical product differentiation model with qualitydependent marginal production costs, where the firm offering the low-quality product has the larger market share and profit than the top-quality competitor. This can be termed lowquality advantage and may explain the success of large retailers serving the masses by offering low-quality products.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp06076.pdf Non-technical summaryWe present a model for the analysis of tax and transfer reforms that integrates a microsimulation labour supply module with an applied general equilibrium module.The labour supply module provides a detailed depiction of individual budget con- General equilibrium feedback further dampens the labour supply reactions through a fall in wages. The differences between the two versions with different aggregation levels are in general larger than those between the partial and the general equilibrium model. The labour supply changes in the different model versions range from 1.38% to 2.68%, which indicates that model choice is an important issue. Our preferred model, the disaggregated general equilibrium variant, is located at the lower bound of the range of labour market effects.

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp06076.pdf Non-technical summaryWe present a model for the analysis of tax and transfer reforms that integrates a microsimulation labour supply module with an applied general equilibrium module.The labour supply module provides a detailed depiction of individual budget con- General equilibrium feedback further dampens the labour supply reactions through a fall in wages. The differences between the two versions with different aggregation levels are in general larger than those between the partial and the general equilibrium model. The labour supply changes in the different model versions range from 1.38% to 2.68%, which indicates that model choice is an important issue. Our preferred model, the disaggregated general equilibrium variant, is located at the lower bound of the range of labour market effects.