Comments: Everyday arbitrage: car rental

"So how can rental car companies cover maintenance on their fleets when they charge less than standard reimbursement? ..."

Why would the standard reimbursememt rate be a consideration for the rental car company?
It matters to the consumer, but from the POV of the rental company it's just one of many factors that, in combination, determine demand.

"Won’t the adverse-selection problem, of which my trip is an example, do them in? ..."

All the rental company needs is to assure is that your rental revenue, minus the marginal costs due to your rental, exceeds the marginal value of the car sitting on the lot awaiting a last minute rental customer.

"Neighborhood Enterprise offices used to charge by the mile. Why did they switch to the unlimited-mileage model?"

The unlimited mileage model is not really unlimited, since it takes both gas and actual driving time.

It's one thing to have unlimited free desserts, but miles are a means to the end of reaching a destination, not an end in and of themselves. While the rental company may not charge for the miles, the costs of those miles are still significant to the consumer.

It seems unlikely that the service costs of a car in the first year of fleet use are much affected by the actual miles driven in unlimited mileage plans. Nor should the resale value be much affected.

Note that the unlimited mileage plans are likely only offered when cars are available not rentable for higher profit rates at that time.

Regards, Don


Posted by Don Lloyd at September 1, 2008 06:02 PM

"Why would the standard reimbursememt rate be a consideration for the rental car company?"

I guess I wasn't clear. I was assuming that the std. reimbursement rate reflects something genuine, beyond gas and oil expenses, namely the marginal cost of driving a car on its resale value, plus wear and tear on the tires and other parts.

"All the rental company needs is to assure is that your rental revenue, minus the marginal costs due to your rental, exceeds the marginal value of the car sitting on the lot awaiting a last minute rental customer."

The local Enterprise lot typically rents out all its cars by the end of the day. I reserved mine in advance. In general, to survive at any given size, a rental car company not only needs to cover not only its variable costs, but also its average costs.

"The unlimited mileage model is not really unlimited, since it takes both gas and actual driving time."

Okay, miles driven won't be infinite. But surely a zero price per additional mile fails to recoup the rental company's marginal cost for each additional mile the customer drives. The puzzle is, how does it manage to recoup average cost?

"It seems unlikely that the service costs of a car in the first year of fleet use are much affected by the actual miles driven in unlimited mileage plans. Nor should the resale value be much affected."

On the contrary, there's no question that higher mileage cars, ceteris paribus, sell for less. About 15 cents a mile less, last time I looked. Look at any rental car company's offerings of its used cars for sale, and see if the higher mileage cars of a given model and year don't go for less.

Posted by Lawrence H. White at September 1, 2008 10:39 PM

The correct approach to a problem like this would involve the inclusion of the relevant costs associated with alternative marketing arrangements. For example, the absence of prices for miles driven is consistent with market efficiency once it is recognized that the benefits for car rentals in charging for mileage may be less than the decision to forgo pricing these services.


Posted by matthew mueller at September 2, 2008 12:28 AM

"...On the contrary, there's no question that higher mileage cars, ceteris paribus, sell for less. About 15 cents a mile less, last time I looked. Look at any rental car company's offerings of its used cars for sale, and see if the higher mileage cars of a given model and year don't go for less."

But the only mileage in question is that increased by the free unlimited miles plan.

I suspect that you will only drive about 500 miles on your trip independent of whether you have an unlimited miles plan or not, assuming that either plan makes sense to contract for.

Also, a given car will only serve a part of its rental life under an unlimited miles plan.

So it's not at all clear that cars rented under an unlimited miles plan will actually have significantly more mileage at resale time.

Regards, Don

Posted by Don Lloyd at September 2, 2008 01:00 AM

"...Okay, miles driven won't be infinite. But surely a zero price per additional mile fails to recoup the rental company's marginal cost for each additional mile the customer drives. The puzzle is, how does it manage to recoup average cost?"

My assumption is that a simple price model is $X fixed cost plus $Y per mile. Y is zero for the unlimited miles plan, but there is nothing that prevents setting X high enough to make up for the fleet statistical miles actually driven under the unlimited miles plan. The choice of plans is likely necessary to remain competitive for both high and low mile customers.

Regards, Don


Posted by Don Lloyd at September 2, 2008 01:15 AM

Who sets the standard reimbursememt rate? I think it might be a government mandated minimum (first result in a google search states "The University of Toledo follows the reimbursement guidelines of the Ohio Revised Code." But this is a public institution. Anyone know if private firms are bound by this?)

If the government sets the rate, there is no reason to believe it is "genuine" in a per-mile cost of use sense.

Of course, this would only move the actual cost per-mile up or down and says nothing to the pricing scheme.

Posted by William Luther at September 2, 2008 04:08 AM

Two questions I would ask:

1) Do rental companies pay the same price for new cars as average consumers?

2) Are maintenance costs for fleets the same as those for average consumers?

I suspect that rental companies have lower costs for both of these.

Also, the average wear and tear figured into the fixed price may not have as much variance as miles driven because those driving shorter distances may be using the car to drive around town (harder on the car), and those driving longer distances may be logging more highway miles (easier on the car).

Posted by Rolo Tomasi at September 2, 2008 11:09 AM

The major rental companies all have agreements with the car manufacturers than insulate them (to some degree) from declines in the value of the used car. The manufacturers justify these "program" cars because they serve as advertisements and buffer production capacity. In effect, rentals are partly subsidized.

The mileage reimbursement rate for most organizations follows the set IRS rate. I think you need complicated reasons to deviate from it. The rate is intended to capture the full lifetime cost per mile of the vehicle, including depreciation, insurance, fuel, maintenance, etc.

So, between the manufacturer's subsidy and the difference between fixed and marginal pricing, you should not be surprised to see some "good deals" on rentals at times.

Posted by Bob Knaus at September 2, 2008 05:12 PM