| Paper towels, like most consumer goods, are sold according to modified non-linear pricing schedules. That is, different sized packages of a single brand are simultaneously offered at different unit prices (typically larger sizes are cheaper, per unit). This practice may be the result of firms engaging in second-degree price discrimination, differences in (production, distribution, or marketing) costs across package sizes, or both. I attempt to infer the existence and extent of price discrimination in the paper towel market using two different approaches.;Using a "reduced form" modeling approach, I develop and implement four tests to determine whether volume discounts in the paper towel market are consistent with price discrimination. These tests exploit variation in the product menu and measures of market power, that do not affect costs but are related to firms' ability to price discriminate. Patterns in prices consistent with predictions about the behavior of price discriminating firms are found in each case, and taken as evidence of price discrimination based on package size in the paper towel industry Then I develop and estimate a structural model of demand and firm conduct in the paper towel market to provide a quantitative measure of the extent to which price differences across different sizes of paper towels are the result of price discrimination.;In addition to identifying and quantifying the extent of price discrimination, I address the welfare effects of volume discounts in the paper towel market. Second degree price discrimination in oligopoly has ambiguous effects on both profits and welfare. Using estimates from the structural model, I construct equilibrium prices, profits, and welfare under alternative (counterfactual) behavioral assumptions. Results from the counterfactual analysis suggest that (1) unit price discounts increase consumer surplus, and (2) the paper towel market may be close to "all-out competition"---in which either restricting the product menu (i.e., offering fewer sizes) or uniform pricing (i.e., charging the same unit price for all sizes of the same brand) would result in prices that lie above the range of discriminatory prices, in stark contrast to monopoly price discrimination. |
