Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The Flat Rental Puzzle

The Flat Rental Puzzle Why is the price of renting an automobile “flat” as a function of its age or odometer value? Specifically, why is it that car rental companies do not offer customers the option of renting older cars at a discount, instead of offering only relatively new cars at full price? We also tackle a related puzzle: why do car rental companies trade-in their vehicles so early? Most US companies purchase brand new rental cars and replace them after 2 years or when their odometer exceeds 34,000 km. That is a very costly strategy due to the well-known by rapid depreciation in used car prices. We show that in a competitive rental market, prices are a declining function of odometer and cars are rented over their full economic lifespan. Our solution to these puzzles is that actual rental markets are not fully competitive and firms may be behaving suboptimally. We provide a case study of a large car rental company that provided us access to its operating data. We develop a model of the company's operations that predicts that the company can significantly increase its profits by keeping its rental cars twice as long as it currently does, discounting the rental prices of older vehicles to induce its customers to rent them. The company undertook an experiment to test our model's predictions. We report initial findings from this experiment which involved over 4500 rentals of over 500 cars in 4 locations over a 5-month period. The results are consistent with the predictions of our model, and suggest that a properly chosen declining rental price function can increase overall revenues. Profits also increase significantly, since doubling the holding period of rental cars cuts discounted replacement costs by nearly 40%. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

The Flat Rental Puzzle

Cho, Sungjin; Rust, John
The Review of Economic Studies , Volume 77 (2) – Apr 1, 2010
Download PDF
35 pages

Loading next page...
 
/lp/oxford-university-press/the-flat-rental-puzzle-VpiorslfxB

References (15)

Publisher
Oxford University Press
Copyright
© Published by Oxford University Press.
Subject
Original Articles
ISSN
0034-6527
eISSN
1467-937X
DOI
10.1111/j.1467-937X.2009.00556.x
Publisher site
See Article on Publisher Site

Abstract

Why is the price of renting an automobile “flat” as a function of its age or odometer value? Specifically, why is it that car rental companies do not offer customers the option of renting older cars at a discount, instead of offering only relatively new cars at full price? We also tackle a related puzzle: why do car rental companies trade-in their vehicles so early? Most US companies purchase brand new rental cars and replace them after 2 years or when their odometer exceeds 34,000 km. That is a very costly strategy due to the well-known by rapid depreciation in used car prices. We show that in a competitive rental market, prices are a declining function of odometer and cars are rented over their full economic lifespan. Our solution to these puzzles is that actual rental markets are not fully competitive and firms may be behaving suboptimally. We provide a case study of a large car rental company that provided us access to its operating data. We develop a model of the company's operations that predicts that the company can significantly increase its profits by keeping its rental cars twice as long as it currently does, discounting the rental prices of older vehicles to induce its customers to rent them. The company undertook an experiment to test our model's predictions. We report initial findings from this experiment which involved over 4500 rentals of over 500 cars in 4 locations over a 5-month period. The results are consistent with the predictions of our model, and suggest that a properly chosen declining rental price function can increase overall revenues. Profits also increase significantly, since doubling the holding period of rental cars cuts discounted replacement costs by nearly 40%.

Journal

The Review of Economic Studies – Oxford University Press

Published: Apr 1, 2010

There are no references for this article.