A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:
A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Question

Quizplus · Accepted Answer

The practice described is an example of a two-part tariff, which involves charging a fee (in this case, the $10 for the frequent buyer card) and then offering a discount on purchases. This allows the seller to extract more consumer surplus by charging a higher price to those willing to pay for the card while also incentivizing more frequent purchases. Peak-load pricing involves charging higher prices during periods of high demand, intertemporal price discrimination involves charging different prices for the same good at different points in time, and bundling involves offering multiple goods or services at a lower price than buying them separately. None of these practices are directly applicable to the frequent buyer program described.

A National Chain of Bookstores Has Initiated a Frequent Buyer