Don't Give Away the Razor (Usually): A Note on Two-Part Tariffs

12 Pages Posted: 4 Jun 2014

See all articles by Richard Schmalensee

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 2, 2014

Abstract

The so-called “razor-and-blades” pricing strategy involves setting a low price for a durable basic product (razors) and a high price for a complementary consumable (blades). Oi (1971) showed that if consumers’ demand curves differ and do not cross, a monopolist should always price blades above cost. This note studies the optimal razor price, assuming constant unit costs and linear demands. With a uniform distribution of parallel demand curves it is never optimal to sell the razor below cost, while with two types of consumers and non-crossing demands it is optimal to do so for some parameter values.

Keywords: pricing, two-part, razor-blades, discrimination, monopoly

JEL Classification: L1

Suggested Citation

Schmalensee, Richard, Don't Give Away the Razor (Usually): A Note on Two-Part Tariffs (June 2, 2014). Available at SSRN: https://ssrn.com/abstract=2445034 or http://dx.doi.org/10.2139/ssrn.2445034

Richard Schmalensee (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-525
Cambridge, MA 02142
United States
617-253-2957 (Phone)
617-258-6617 (Fax)

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