Assignment - PART 6

Currently, all our customers are charged the same daily rate. (The only exception is customers under 25 years of age who have to pay the $12.50 daily surcharge according to the company policy.)

What are your thoughts on our chances to increase our revenue and profit charging different prices to different groups of customers?

If you think we should explore such a possibility, make sure to include the details of the implementation plan.

(1) Recognize the necessary conditions for successful price discrimination;

(2) Compare and contrast cost-based and value-based pricing approaches;

(3) Apply theoretical foundations to forecast the expected outcomes of various pricing strategies.

Assignment - PART 7

Our customers who choose to keep a car for an extra day are currently paying the same base daily rate. Do you see any potential in exploring alternative schemes? If so, what changes should we implement price those extra days at a higher rate? Lower rate? What considerations are involved in this decision? Provide your thoughts on this issue.

1) Explain the reasoning behind volume discounts;

(2) Recognize the impact of increasing marginal cost on supply;

(3) Describe the negative impact of uncertainty on firms operations.

(Students are expected to contrast the volume discount philosophy with the need to account for increasing marginal cost due

to uncertainty resulting from customers keeping a car for an extra day. The former consideration suggests the optimality of charging a lower rate for additional days whereas the latter one calls for an increasing rate to cover the rising inventory costs. Both considerations are valid and need to be weighed against each other. Students may also be able to reflect on the possibility of moral hazard created by consumers who would take advantage of the lower-extra-day-rate scheme by renting a vehicle for a short term at the base rate and then extending the length of the rental as needed, reducing the company profit potential. The best answers would recognize and explore the distinction between attracting customers willing to rent a car for a longer term and spontaneous decision to extend the lease. The discussion of uncertainty issues serves as a preamble to an in-depth coverage of the economics of uncertainty and information typically done later in the course.)

Assignment PART 8

Our competitor has launched an aggressive ad campaign, advertising the $24.99/day rate for an economy car starting next week. This is a sharp $8 decrease from their average price over the last four months. Based on their prior pricing patterns, we expect the same price reduction to occur in their other vehicle categories.

How strong of an effect, if at all, do we expect this announcement to have on our weekly revenues if we maintain the price you have recommended previously?

Should we try to respond to their price reduction with one of our own, or should we ignore it and proceed doing business as usual?

If we decide to reduce the price, how deep should our discount be?

(In order to answer this question properly, students are expected to go back to the demand equation that included the competitors price (Pcomp) as one of the independent variables. The procedure is no different from the one used in assignment 2. In both cases, students have to pick a value for Pcomp to plug into the demand equation before they proceed to revenue maximization. In the present assignment, the lower value of Pcomp will result in a smaller vertical intercept of the demand curve for Rent-A-Car vehicles and consequently in the lower optimal price it should charge.)

Assignment PART 9

One of the board members inquired about the use of a price match guarantee which would mean we promise to match our competitors price for a certain vehicle category if their price happens to be lower than ours. I need your opinion about the viability of such a policy in our case would it be a good idea? Separately, how widely should we advertise such a policy if we decide to adopt it?

(Two themes tend to prevail in the discussion of price-matching policies. On one hand, a price-matching policy can serve as a tool for price discrimination between informed and uninformed customers. The rationale is that price-sensitive customers put more effort into searching for discounts and are more likely to receive the reduced price matching that of a competitor. Groups with less elastic demand continue to pay the price that may exceed that of the competitor. According to this logic, the availability of information should be limited.

On the other hand, price-matching guarantees may help facilitate implicit price collusion and avert price wars in concentrated markets. This is because once a merchant adopts this marketing tactic, its rivals can no longer lure away its customers by charging a lower price, and therefore have little incentive to initiate a price cut. According to this logic, it is better to make the price-matching policy widely known. Once advertised, it effectively places the responsibility for pricing policy onto the competitor. An important caveat to this approach is that it is effective only if the firm offering the price-matching guarantee has a cost advantage over the competitor. Otherwise, commitment to such a policy can be self-destructive in the case of a price war.)