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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A bank charges a monopolist-style two-part pricing on a premium credit card: an annual fee F plus a per-transaction charge equal to marginal cost c. All customers have identical demand. Which fee F would maximise profit while all customers still hold the card?

The profit-maximising fee equals each customer's consumer surplus when transactions are priced at marginal cost. This extracts all surplus through the fixed fee while keeping every customer willing to hold the card, so the bank captures the maximum possible profit.

  1. AZero, because price equals marginal cost
  2. BThe consumer surplus each customer obtains when transactions are priced at cCorrect
  3. CHalf of the consumer surplus at price c
  4. DThe monopoly profit from a single-price strategy
  5. The total cost of providing the card to all customers

Explanation

With identical customers, setting the usage price at marginal cost gives the efficient quantity and the largest surplus. The bank then extracts that whole consumer surplus through the fixed fee, leaving customers just willing to participate. A lower fee leaves profit on the table; a higher fee loses customers.

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