Avis is the Australian largest car rental company, with 33% market share across the nation’s airports, employing 1000 staffs in 240 locations (Super brands 2009). The company entered Australian market in 1955, initially only had a market share of just 10- 11% of the car rental market. In 1962 Robert Townsend joined as President of Avis and introduced a bold advertising campaign focusing on the company’s customer service: “We’re No.2. We try harder!”. The message, together with its actual implementation of excellent customer service, were big factors contributing to Avis’s success in gaining more market power (Bob Ansett 2008)
Avis is part of the Avis Budget Group which operates two of the most recognized brands Avis and Budget, targeting the travel industry premium commercial and leisure segments and price conscious segment respectively. Both brands benefit from sharing the same fleet, maintenance facilities, systems, technology and administrative infrastructure. Avis and Budget both enjoy complementary demand patterns with weekday commercial demand balanced by weekend leisure demand. (Avis Budget Group 2009)
CAR RENTAL INDUSTRY
Car rental operates in an environment that is related and complementary to other sectors such as casinos, car rental agencies, hotels and tour operators. The majority of car rental companies are small businesses and the five largest companies are Avis, Hertz, Budget, Europcar and Thrifty. With 55,000 rental vehicles were registered across Australia, the motor vehicle hiring industry is highly competitive market, but is also highly concentrated with The Big 5 account for 75 percent of business turnover in the sector (ACCC 2005).
In 2004 there was a case of price fixing in the car rental industry. Considerable fines handed out to companies involved in the cartel that fixed prices for one way car rentals between Alice Springs and Ayres Rock. The fines and costs in that case totaled $1.5 million (ACCC 2004), which indeed sent a clear message to the industry. During this economic down turn, the industry has been badly affected by declining demand (The Age 2009). Both corporate and tourism market activities reduce. On top of that, car rental companies have previously relied on the line of credit to turnover their vehicle stock, but such credit is no longer available in this financial crisis. Companies LinhThuy Vu s2113253 Page 3
such as Hertz and Avis have good lines of credit and therefore are ahead of the game compared to many smaller operators who will continue to struggle to get financing and fall by the wayside (Making Life Ezy Market Research 2009). It’s an opportunity for the big car rental companies to pick up businesses from those failing in the tough market. ANALYSIS OF AVIS’S PRICING STRATEGIES
QUANTITY PRICE DISCRIMINATION
An inquiry on Avis reservation website reveals that daily rate for a 30 day hire is significantly cheaper than daily rate for short term rental. The base rate for an Economy Hyundai Getz 3 Door is $31/day if hired for 30 days, but the rate for the same car for 7 days is $39/day, and goes up to $58/day if rented for 1 day only (Avis Australia 2009). The rental fee per day is reduced to nearly half if the number of hire days goes up to 30 day. Further research confirms it is a common practice in the car rental industry to price discriminates based on number of rental days (Bureau of Transport and Communications Economics 1988).
Quantity price discrimination, also known as second degree discrimination, is a pricing strategy that varies price according to quantity sold (Perloff 2009). This needs to be clearly distinguished with discount on quantity when the lower sale price is due to the decreased marginal cost, for example wholesale sells large quantity at lower unit price because they can save on retail setup and marketing cost. The marginal cost of leasing a car is the same for Avis regardless of number of rental days. Quantity price discrimination...
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