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abstract

The “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). In a timeless model, Oi (1971) showed that if consumers' demand curves differ and do not cross and unit costs are constant, a monopolist should always price blades above cost. This note studies the optimal razor price. With a uniform distribution of parallel linear demand curves it is never optimal to sell the razor below cost, while with two types of consumers and non-crossing linear demands it is optimal to do so for some parameter values.

4. Concluding observation

s Consistent with the analysis above, cases of below-cost sales of the basic product by monopolies or near-monopolies do not seem common in practice. Gillette is often given credit for originating the “razor-andblades” pricing strategy, but this seems to be a myth.6 During its 1904–21 patent monopoly, Gillette charged a high price for its razor, likely well above cost. It only cut that price (but not the blade price) when its patent expired and competitors with low-priced razors appeared. Low razor prices would have encouraged trial, and, as Schmalensee (1982) argued, a satisfactory experience with one razor-blade combination would discourage consumers from trying other combinations. Similarly, Blackstone (1975) reports that manufacturers of Electrofax copying machines made most of their profit on the special paper those machines required until those manufacturers were barred from requiring that their own high-priced paper be used. But there were many competing manufacturers, and they apparently sold copying machines above cost. Video game consoles provide a final example. These are typically sold below unit cost when they are launched, and the bulk of console makers' earnings come from royalties on games, which are roughly analogous to blade markups.7 However, since console unit costs typically fall with experience, whether expected overall profits on consoles are typically negative is less clear. Moreover, console makers compete for the attention of game developers, who must decide whether or not to develop for a new console well before it is launched. Committing to a low console price provides a positive signal about console sales and thus the audience for games that run on that console to game developers. This is far from classic seconddegree price discrimination.