Identifying Price Discrimination When Product Menus Are Endogenous

A well-known approach to identifying second-degree price discrimination is based on examining correlations between product menus and prices. When product menus are endogenous, however, tests for price discrimination may be biased by the fact that unobservables affecting costs or demand may jointly determine product menus and prices, leading one to falsely infer price discrimination. Using observed product characteristics or fixed effects to control for these unobservables confounds inference on the nature of price discrimination by potentially ‘‘overcorrecting’’ the original bias. I propose a difference-indifferences approach that is robust to this critique. An application to the pricing of different package sizes of paper towels is presented.