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Revenue Management

In: Business and Management

Submitted By priyabhav
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Department of Managerial Economics and Decision Sciences

HOMEWORK: REVENUE MANAGEMENT BY A RENTAL CAR COMPANY:1
You are a consultant hired by a major national rental car company that is seeking to improve its pricing strategy. In particular, it is considering adopting a strategy of customized pricing tailored to the underlying micro-markets that it might face. In the rental car business (as in the hotel and resort business), price customization is known as revenue management. As a test case, your client is considering a pricing experiment at Lambert Airport in St. Louis, Missouri, a location at which your client has dominant market share and thus can safely ignore possible reactions of competitors. Careful market research has revealed that the St. Louis market is composed of two micromarkets. The first comprises business travelers; the second comprises vacation travelers. The demand curves for these two micro-markets are given below: Micro-market Business travelers Vacation travelers Demand curve equation Q1= 3,600 – 20P Q2= 3,000 – 30P

In the table above, P is the daily rental rate, while Q1 and Q2 are the numbers of vehicles rented per day by business travelers and vacation travelers, respectively. Like airlines, the rental car business is one in which the marginal cost of serving an extra customer is nearly zero. For this reason, throughout this exercise, we will assume that your client’s MC = 0. (Of course, your client has fixed costs, but as an astute practitioner of microeconomics, you know that these fixed costs are not relevant to the pricing decision, and so throughout this analysis, we can safely ignore them.) Because MC = 0, whenever, we talk about “profit contribution,” we are actually talking about total revenue. The Deliverables Please complete each of the following tasks. While you do not need to show every step of algebra that you used to...

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