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Pricing the razor: A note on two-part tariffs

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  • Schmalensee, Richard

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.

Suggested Citation

  • Schmalensee, Richard, 2015. "Pricing the razor: A note on two-part tariffs," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 19-22.
    • Handle: RePEc:eee:indorg:v:42:y:2015:i:c:p:19-22
    DOI: 10.1016/j.ijindorg.2015.06.006
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    References listed on IDEAS

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    1. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2008. "Invisible Engines: How Software Platforms Drive Innovation and Transform Industries," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550687, December.
    2. Schmalensee, Richard, 1983. "Product Differentiation Advantages of Pioneering Brands: Errata," American Economic Review, American Economic Association, vol. 73(1), pages 250-250, March.
    3. Andrei Hagiu, 2006. "Pricing and Commitment by Two-Sided Platforms," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 720-737, Autumn.
    4. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
    5. Richard Schmalensee, 1981. "Monopolistic Two-Part Pricing Arrangements," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 445-466, Autumn.
    6. Blackstone, Erwin A, 1975. "Restrictive Practices in the Marketing of Electrofax Copying Machines and Supplies: The SC M Corporation Case," Journal of Industrial Economics, Wiley Blackwell, vol. 23(3), pages 189-202, March.
    7. Walter Y. Oi, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(1), pages 77-96.
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    Cited by:

    1. Miao, Chun-Hui, 2022. "The pricing of ancillary goods when selling on a platform," International Journal of Industrial Organization, Elsevier, vol. 83(C).

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    More about this item

    Keywords

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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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