They are napkins with SpongeBob SquarePants' face imprinted on them and are, according to Mr. Krabs, extra absorbent to reflect the species of a sponge.
Role in the episode
After SpongeBob becomes immensely popular as a result of food critic Gene Scallop's review of the Krusty Krab, Mr. Krabs decides to rename his restaurant "The Krusty Sponge." Many SpongeBob-themed items are produced for the restaurant, including these napkins. Squidward thinks that Krabs should go see a doctor for this creation amongst the many other SpongeBob products.
SpongeBob napkins have been marketed in real life before.