Wednesday, September 1, 2010

Price Discrimination and Car Rentals

Yesterday, I read this interesting post on the Freakonomics blog from Daniel Hamermesh:

My son is renting a car in December. He’ll drive it for two days in Orlando, then he’ll drive to South Florida for an eight-day stay. With the drop-off charge, the price is $900. But if he drops the car off in South Florida when he arrives and rents a new one from the same company, the total price is only $500. He values his time spent dropping off the car at less than $400, so he’ll do it.

The prices are similar at all the car rental companies. Why this deal? It costs the companies more—they have to process two reservations/returns, clean two cars. This can’t be cost-based price-discrimination, it must be demand-based; but it’s difficult to separate markets, as my son’s behavior shows. Except for an old example, creating the 386SX chip by lobotomizing the 386DX to reduce its capabilities and charging less for it than for the intact chip, are there any other equally clear examples?

This is a fascinating example of price discrimination (charging different prices for the same product), and the comments on the post add a lot.

There are plenty of people who wouldn't check into returning the vehicle in the middle of a 10-day trip. People who actually look into this option (or options like these) clearly separate themselves as people who respond to the price. Because they are probably also looking into other options for the South Florida rental, they're most likely to flee to another car rental agency. Hence, it makes sense to offer this type of consumer a discount while charging exorbitant rates to people who don't bother to check various pricing options.

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