Harward Pricing Simulation
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Managerial Economics
Harward Pricing Simulation
The car rental industry can be classified as an oligopoly. In an oligopoly, the firms are price setters and they composed of large firms. They supply a slightly differentiated service to their customers. Each firms actions affect market conditions. The competing firms are always aware of a firms market actions and will respond appropriately. While thinking of changes in strategies a firm must take into consideration the possible reactions of all competing firms. Thus, pricing becomes more complex and strategic issue in this industry.
Since company wants to maximize its profit, it must set its prices according to that. In addition to that, company takes into account covering its costs in order to survive in the industry. In the simulation, Universal should shut down their operations if the price of the cars rented is lower than average variable cost which is $15.00. If their price falls below $36.70, which is the average total cost we got while running the simulations they should consider exiting the market
One thing that we noted was, that by increasing prices we were able to make good profits, but lost out on some market share and vice versa. So the decision that we need to make is at what higher price we can increase the profits to, which will offset the market share we lose. We increased prices to $49.90 for the weekday and $45.99 for the weekday and were able to make 24.3 million dollars while losing a market share by 7.1% (we started the simulation at 49.9% and ended with 42.8%).
$37.00
$32.00
$36.00
$32.00
Dec. 428 171
Jan. 435 171
Total Revenue
$985.21
$976.44
Variable Costs
$415.41
$420.01
Vehicle Inventory Costs
$343.54
$343.54
Other Fixed Costs
$220.85
$220.85
Pre-Tax Profit
$5.41
-$7.95