Chapter 61 Question 054

Why do car rental companies not charge extra when customers cancel reservations temporarily, while hotels and airlines charge expensive cancellation fees? If you bought a theater ticket and missed the performance due to traffic jams, the theater will not give you a refund.The same is true for air tickets.If you miss your flight, your ticket is worthless.Even if the airline allows refunds, it will charge a large refund fee.Likewise, most hotels will charge you if you cancel a reserved room after 6:00 p.m. that night.However, rental car companies have adopted a completely different approach.When booking a car in advance, you don't need to provide your credit card number.If you do not come to pick up the car by then, the car rental company will not deduct the money.Why is there such a difference?

Like all sellers, rental car companies want happy and satisfied customers.Customers don't like being charged cancellation fees, so a rental car company that doesn't charge a cancellation fee has a big competitive advantage over its peers.Of course, airlines and hotels have the same reason not to charge fees.Well, the reason why they charge is probably because it costs a lot to tolerate temporary cancellation of reservations by customers without imposing fines.Airlines will have more empty seats per flight, and hotels will have more empty rooms.So, for them to stay in business, charging substantial cancellation fees is a must.

In principle, rental car companies should be under the same pressure.The root reason why they do not charge a cancellation fee may be this: Customers come to rent a car, usually after taking a plane, arriving at their destination, and staying in a hotel.Since both hotels and airlines charge cancellation fees, the general customer who rents a car has a strong incentive to pick up the car on time even if the car rental company does not charge a cancellation fee.That way, rental-car companies can avoid offending customers who are forced to cancel their bookings, which the cancellation policies of hotels and airlines will make fewer and fewer.

In real markets for products, especially expensive ones, the possibility of arbitrage limits the ability of a monopolist to demand high prices from particular buyers. Sellers allow customers to buy at a discounted price, but only if the customer jumps over some kind of threshold first. Any seller with a production process with economies of scale will inevitably use the tool of setting discount thresholds.Discounts for price-sensitive buyers without lowering prices for other customers can drive producers to scale up and reduce average production costs. In some cases, the discount threshold simply requires certain information.Once you have this information, you can enjoy lower prices with no extra effort.

Sometimes it seems like the seller has the right to charge a higher price, or to charge a penalty for cancellation, however, strategically, they don't.