Bookstores often offer annual memberships that allow customers to purc

Bookstores often offer annual memberships that allow customers to purchase books at a 10% discount. Explain why this may increase profits of the bookstore.

What will be an ideal response?

ANSWER

This book club membership program is an example of a two-part tariff. If the consumer purchases a membership, they are able to purchase subsequent books at a discount to the price charged to non-members. This membership is in the best interest of the store’s profits if the consumers increase purchases at the store. That is, the loss in profit margin due to the discount is offset by the membership fee and the increased number of book purchases. If the consumer will not purchases any more books than without the membership and saves money by joining the club, then bookstore profits are reduced. The bookstore must believe that joining the book club will induce the consumer to purchase books more frequently at the bookstore or the membership fee will exceed the customer’s savings.