Separating Markets

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?


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.

Pekka Taipale

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.

trader n

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.

Nicholas Peyton

Working the in the car rental business for a summer in college... I can only say that branches never want to give a car away to another branch (within the same company). Because it is one less car to rent out. And branches compete against other branches for the highest rental rate and number of cars on the lot, number of cars rented for the weekend, etc.

I would guess the fee is a way to compensate the branch losing the car. Plus, as an intern, I would have to drive cars from one branch to another to meet certain needs, and that is a waste of time and money for everyone.


@4 renter

I think you misunderstood the story. In both cases, the car is dropped off in S FL. In the first scenario ($900), he drops off the car in S FL after 9 days. In the 2nd scenario ($500), he drops the original car off when arriving in S FL and rents a new, identical car for the remainder of the 9 days. The question is why is the second scenario cheaper?

Marc Robinson

Once I was at dinner in Cambridge and the "half portions" were about 40% of the cost of whole portions, even though two half portions were much more costly to the restaurant than one whole. After the table of economists speculated for a few minutes on the reason, Dick Zeckhauser asked the owner. He said that he did it to entertain his clientele - who loved analyzing data and finding anomolies.

Andy Elliott

I think this is all about unbalanced directional flows. In Canada, if you want to drive through the mountains between Calgary and Vancouver, the car rental rates are lower if you go from west to east rather than vice versa. Why? Most people want to go from east to west and the car rental companies end up with a surplus of cars in Vancouver, which they then have to move (often in truck carriers) to their "home". The drop off charge is quite simple; they just double the daily or weekly rate if you insistent on going west!


Who cares? This is the kind of story I have to pretend to be interested in at cocktail parties.

It's a pricing error. Wow.

Jay, New York, NY

Even stranger incident.
I recently booked my flights to Jackson Hole from Newark, NJ for $299, with a changeover in Salt Lake City.

Guess how much was the return ticket from Newark to Salt Lake City? $385.


Is there an actual "drop off charge?"

Or is it just that a one-way rental (pick up and drop off are different) costs $x per day, a round trip rental costs $y per day, $x is much larger than $y, and therefore 10x > 2x + 8y


When I sold door-to-door, some of the products were spray cans of things like deodorant, hairspray, bug spray, spot remover, etc, all with different prices like $1.29, $1.59 and $1.79. I made a collage of about 20 pictures of the cans on a sheet with "special offers" of "any two for $3.59 or any three for $5.39. The (mostly) ladies, who mostly want only one or two, fell for the bargain and always paid more.

If a lady wanted a toothbrush (they were 39 cents each then), I offered her a "special deal" of a pack of 24 for $9.39.

Even at my local Target, I find things like breakfast cereal where two smaller boxes of breakfast food cost less than the double sized one.

The lesson: those who can't do arithmetic support those of us who can. You just can't imagine how much folks are daily robbed in dealing with used cars, energy-efficient appliance, insurance and medical care!

A sadder lesson: in Amerika, almost all our national leaders are unschooled in advanced math, engineering, economics and science -- almost all being history or English majors or lawyers -- like Obama and the Supremes (some 8 of 535 in Congress are actually scientifically literate). When it comes to "global warming," pollution, energy policy and other scientific and economic issues, we are forced to acknowledge that we are ruled by ignoramuses.

I bet I could sell any of them a package of 24 bogus ideas in 3 minutes, the time the Fuller Brush Man allots himself to close a sale.

In contrast, both Thatcher and Merkel are PhD scientists.


Ian Kemmish

I'd go with comments 4 and 9. During the volcano affair this spring, people trying to hire cars to get back home found that the charges were a lot lower if, for example, someone in Rome trying to get to London also knew someone in London trying to get back to Rome. (The answer becomes more obvious if you increase the distances and start mixing left hand drive and right hand drive cars!)

One of the big car hire companies even put someone on the TV news explaining it in words of one syllable - though that didn't stop people complaining that it was a rip-off!


Renter and Nicholas are missing the point--in both cases, the son is taking the car to another city and leaving it there. He's saying that these are his son's two options:

1. Rent car in Orlando. Drive it there for 2 days. Drive to S.Florida. Drive it there for 8 days. $900

1. Rent car in Orlando. Drive it there for 2 days. Drive to S.Florida. Turn it in, and immediately rent a new car. Drive it there for 8 days. $500

Scheduling (which days cars are in highest demand in either location), price differences for length of rental (does 10 days straight somehow trigger a higher rate than 2 days + 8?), or some software shortcoming seem most likely.

David Gunter

I guess I don't understand what is going on from the first paragraph. Is the only difference going to be that he's dropping the car off (and renting another) at the beginning of his South Florida stay versus dropping of the car in South Florida at the end? In other words, in both cases is he dropping a car off in South Florida that was rented from the Orlando facility?


A couple examples come to mind: Partially-processed brown sugar is more expensive that fully-processed (and bleached!) "normal sugar".

Another one: Longer distance flights with a stopover or plane switch are sometimes less expensive than the same flight without the extra flight leg. So if you fly to Los Angeles via Phoenix, it's sometimes cheaper than buying a ticket to Phoenix on on the same plane.