Don't Give Away the Razor (Usually): A Note on Two-Part Tariffs
12 Pages Posted: 4 Jun 2014
Date Written: June 2, 2014
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: Suggested Citation