|INSTRUCTOR DISCUSSION NOTES:
The Nine-Blade Razor Canít Be Far BehindÖ
1. Consider shaving a production process, with the output being a clean, close shave. How does diminishing marginal productivity play a role in how many blades a razor can have?
Ultimately, the size of the razorís head will become a fixed factor, and each additional blade will not have as great an impact on shaving as the previous one. (Thereís no documentation for this, it just makes sense.)
2. What would happen to the elasticity of demand for the Quattro—and for the Mach3—razor when the Fusion comes on the market next year? Why?
Demand for the Quattro and the Mach3 should both fall and become more elastic, as the Fusion cuts away at the othersí market shares. The Fusion will be seen as an additional substitute good in the market, making the good more elastic.
3. Does the significant spending on advertising the Fusion amount to a prisonersí dilemma? Why or why not?
Definitely. That significant advertising expense could serve merely as a way to reduce profit, in which case both Gillette and Schick would have an incentive to collude and not advertise to the extent that both do. This implies that advertising is, indeed, a prisonersí dilemma outcome. Since Schick has a much smaller market share than Gillette, it has a great incentive to advertise to try to take away market share from Gillette. Hence, Gillette will advertise.
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