Nonlinear pricing in an oligopoly market: the case of specialty coffee

Firms that use nonlinear pricing may distort product characteristics away from their efficient levels. This paper offers the first empirical study of this issue. Using data from a specialty coffee market, I estimate a structural utility model to compute consumers’ benefits from changing products’ sizes. I then compare the estimated benefits to cost data. Design distortions are relatively large for products not targeted to the highest-demand consumers. Distortions decrease toward zero with drink size for products with the largest profit margins. These results support some of the central predictions from nonlinear pricing theory, including “no distortion at the top.”