Heterogeneous Price Effects of Consolidation: Evidence from the Car Rental Industry

Ali Umut Guler (), Kanishka Misra () and Vishal Singh ()
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Ali Umut Guler: Koç University, 34450 Sariyer, Istanbul, Turkey
Kanishka Misra: Rady School of Management, University of California, San Diego, California 92093
Vishal Singh: Stern School of Business, New York University, New York, New York 10012

Marketing Science, 2020, vol. 39, issue 1, 52–70

Abstract: We study the price effects of consolidation in the car rental industry using three cross-sections of price data from U.S. airport markets spanning the years 2005 to 2016. The auto rental industry went through a series of mergers during this period, leading to a significant increase in market concentration. We find that the concentration of ownership affects the business (weekday) and leisure (weekend) segments differently. Average weekday prices rose by 2.1% and weekend prices fell by 3.3% with the increase in market concentration. Given the periodic differences in demand from business and leisure travelers, we explain this finding with a model of horizontal product differentiation that allows for heterogeneity in customer types and firms’ marginal costs. Consolidation leads to marginal cost savings, but the extent to which these savings are passed onto different customer types depends on the magnitude of switching costs. In particular, weekday customers with high switching costs are charged higher prices because of suppliers’ augmented market power whereas the more price-sensitive weekend segment enjoys the lower prices facilitated by efficiency gains. Our findings highlight that consolidation can have differential welfare effects on different customer groups and merger analyses should account for the heterogeneous impact based on firms’ price discrimination practices rather than just considering average effects.

Keywords: market concentration; mergers; market power; cost efficiencies; price discrimination (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:39:y:2020:i:1:p:52-70

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