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?
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I think it’s less prevalent now than it once was, but some flights through a hub are cheaper than flights to a hub. I remember booking a flight from Hartford to Omaha via O’Hare because it was cheaper than the flight terminating at O’Hare. They tried to mitigate that pattern by canceling the return flight if the passenger didn’t check in for the second leg.
There are lots of examples. Who whole of software industry. And the traditional industries are adopting the way software industry operates. For instance, some Volvo diesel car models are made so that every manufactured car has the necessary hardware for an auxiliary heater; enabling it is a software feature that can be sold and installed at a service point.
Is the drop-off charge simply implemented as a function of the total length of rental time, or a multiplier on the base rate?
If the company does not want to (or did not want to when they wrote their business rules into SABRE decades ago) develop and maintain a point-to-point matrix of drop off charges between each and every location, then total time of rental is probably a useful proxy for the net amount of obnoxiousness to the company to repatriate or replace the vehicle from the source location.
That’s because, although they may be part of the same franchise, most car rental agencies need to make arrangements to get the car back to it’s original rental location (or at least secure a replacement vehicle). Since some locations are far more popular destinations than others, eventually most of the vehicles would end up in the same popular cities if they weren’t returned to their location of origin. In your example, the rental agency incurs the cost of the return trip – which is why the charges are higher for this type of rental. Doesn’t seem to be a “market” issue at all.
Back when tires had white sidewall stripes, my father balked at paying a higher price for them when identical (but stripeless) tires were also available. He later discovered that the tires were more identical than he’d realized: the “black sidewall” tires the shop sold him were simply white sidewall tires installed with the striped surface facing the underside of the car instead of outward.
Perhaps the charge is related to when the drop-off is. Many tourists make the trip from South Florida to Orlando and vice versa, I would wager the drop off charge is a function of the flow of tourists. (.i.e, is there a ready supply to return the car, or will it sit idle for a few days)
Trust me from living in Orlando, if the tourism industry in Florida can figure out a way to make more money, it has already.
I worked at a butcher shop and we would sometimes grind down expensive cuts of meat for hamburger.
In theory it would be easier (less labor intensive) to simply mark down the steaks to the same price as hamburger, but there are many reasons why it wouldn’t be favorable (ie. overall more profitable) to do so.
Your son revealed that he was willing to go through the hassle of returning the car, signaling that he is more price sensitive than someone who wasn’t as willing. If others wouldn’t go through this hassle (or even bother to check for such a deal), isn’t that evidence of the ability of this pricing technique to separate the market (rather than evidence of it being difficult to do so)?
They may not be separating geographically, but based on willingness to pay.