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

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

Published: Apr 1, 2010

There are no references for this article.

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off