I’m at the point in my pricing class where I go on about the pricing of razors and blades. The widespread belief on this matter is captured by the following quote from Chris Evans, the author of a book called FREE.
Gillette made its real profit from the high margin on the blades.
Price razors low and make one’s living off the blades. Replace razors by aircraft engines and blades by parts or razors by game consoles and blades by games and you have a universal prescription. Does it make sense?
Suppose, initially, a monopoly supplier of razors and blades. Each razor will last 52 weeks and a pack of blades will last 4 weeks. Suppose a weeks worth of shaving to the buyer is worth $10. How could I price the razor and the blades? First, razor at $480 and blades free. Second, razor for free and pack of blades at $40. Third, any combination of the two that sucks out $480 from the buyer. In the absence of other considerations there is nothing to suggest price razors low and blades high is better than the reverse. If the buyer is liquidity constrained, high priced razor and low priced blade might be a bad idea. High priced razors and low priced razors also raise the possibility of hold up because after I sell you the razor, what is to stop me from jacking up the price of the blades?
OK, suppose one has settled on low price razor and high priced blade. This makes you vulnerable to a competitor with a lower priced blade compatible with your razor. If they enter, you would respond by raising the price of the razor and lowering the price of the blade. In this case, what about a competitor entering with a razor compatible with your blades? Now the competitors have you coming and going!
Well then, the problem appears to be the interoperability of razors and blades (maybe not, but that comes up later in the class). So, design a razor and blade system incompatible with the competitions. Now one is selling a system rather than the individual components. So, price the system rather than the individual components.
What then is the origin of the low priced razor high priced blade wisdom? Haven’t the faintest. If we turn to reverent authority, King Gillette, he introduced the razor and disposable blade around 1904. The razor and a pack of 12 blades sold for $5. Subsequent packs of a dozen blades were sold for $1. At that time, $5 was about 2 days wages for the average factory worker!
The Leisure of the Theory Class 
6 comments
February 7, 2012 at 12:59 pm
Steven
The standard argument for low-priced razor and high-price blade is price discrimination between intense and light users. Assume a monopolist for both products, with zero marginal costs for both blades and razors. All consumers value shaves at $10/week, but intense users go through a pack of blades every two weeks, while light users go through a pack of blades every four weeks. To extract the full $520 of consumer surplus for both types, the only linear pricing scheme that will work (and doesn’t involve bundling) is $520 razor, $0 blades. The generalizations (e.g., positive marginal costs, value of a shave correlated with required blades, etc.) should be fairly obvious.
Of course, with compatibility and competition, this sort of price discrimination breaks down, for the reason you note.
February 7, 2012 at 1:28 pm
rvohra
Dear Steven
Yes, the textbook 2 part tariff analysis suggests high priced razor and low priced blade. I’ve never been keen on this because of the unexplained constraint on the class of pricing rules permitted. As you noted one could have obtained the same revenue by bundling. Even if you restrict attention to 2 part tariff’s, the result is sensitive to the number of segments and their mix. One can work up examples where the optimal two part tariff would lower the price of the razor and raise the price of the blade.
February 7, 2012 at 4:42 pm
Bradley Evans
It sounds like an urban legend, so I went to snopes.com first. Nothing.
A lawyer named Randal Picker wrote a long, long article: http://bit.ly/wdUnpw. It sounds like the facts don’t bear out the legend.
In other words, lock-in, in theory, should work. In history, it either didn’t work, or wasn’t used.
February 8, 2012 at 11:36 am
rvohra
Dear Bradley
Thank you very much for the Picker reference. This is was a delight to read with a wealth of information about razors and blades that I had no idea about. Wish I had known about it earlier.
February 9, 2012 at 6:36 am
gia su
Grateful to you for this article
February 9, 2012 at 7:51 am
Michael
An argument for overprized blades is that producers cannot commit to a complete pricing scheme and are therefore always tempted to exploit the existing consumer base in the aftermark. The point is made in a paper by Borenstein, Mackie-Mason, and Netzt: Exercising Market Power in Proprietary Aftermarkets. The WP version can be found at http://ideas.repec.org/p/wop/calbha/_002.html