How Much Should Costco Charge for Membership? Without Costco membership the price ratio is given by the slope of the “Without Costco membership” budget constraint and the consumer chooses the bundle at “No Costco.” If the consumer joins Costco they can buy the goods that Costco sells at lower prices so the budget constraint rotates out. With no membership fee the consumer would consume the bundle at “Costco without fee.”
Costco would like to charge as high a membership fee as possible. The membership price is a decrease in the consumer’s income so we can ask how much income can we take from the consumer and still leave the consumer at least as well-off as without membership?
The Ideal membership fee (from Costco’s point of view!) is the reduction in income that keeps the consumer on their old indifference curve. With the ideal membership fee the consumer consumes the bundle at “Costco with fee.”
Costco would like to charge as high a membership fee as possible. The membership price is a decrease in the consumer’s income so we can ask how much income can we take from the consumer and still leave the consumer at least as well-off as without membership?
The Ideal membership fee (from Costco’s point of view!) is the reduction in income that keeps the consumer on their old indifference curve. With the ideal membership fee the consumer consumes the bundle at “Costco with fee.”