Friday, December 28, 2007

Why do Car Rental Companies Charge for a Second Driver?

Some car rental companies--including Thrifty at the Boston Airport, where we picked up a car yesterday--charge a significant amount if you want to have two different people allowed to drive the car. It's hard to see why their cost is any higher if my wife and I take turns driving, instead of her doing all of it. And one might think the risk of accidents that damage their car would be less if we were free to have me drive when she is tired. So why the charge?

One possibility is that it's price discrimination, that they think that if two people are going to use the car, the customer expects to use it more and so will pay a higher price--but given how competitive the market is, that doesn't seem very plausible. Another is that it's an attempt to mislead customers doing price comparisons--put in additional charges that won't show up when you go to a web page to compare prices from alternative sellers. That doesn't strike me as terribly plausible either.

Does anyone have a better idea?


Anonymous said...

It does seem plausible that there might be a relation between the amount of drivers and the amount of miles driven.

Either because people can take turns driving, or because they do not intent to travel together but take turns using the car.

Anonymous said...

It’s clearly your latter explanation, although I don’t think it’s a clear case of deception. You didn’t explain why that’s not plausible, but presumably you don’t think car rental companies want to aggravate their customers.

I disagree. Couples or families don’t travel enough to develop much brand loyalty and they generally just pick the cheapest price listed on Expedia.

The combination of extreme price competition at the point of reservation and a high level of customer captivity at the counter create a situation where the actual rental rate is almost a loss leader while the add-ons are extremely profitable. This combination of inelasticity and captivity equals high prices, especially when compared to the point of reservation where the situation is reversed: high price elasticity and low customer captivity.

The same goes for the insurance, but in both cases people inclined to pay for peace of mind probably aren’t especially price conscious at the counter even if they would pick the lowest price at the time of reservation.

Personally, I think many people just ignore the driver restrictions. I suppose that’s a violation of the rental agreement, but it’s hard to see any risk of negative consequences that would outweigh the cost. Those reckless types will probably decline the insurance and 2nd driver options with little regard for the price.


TJIC said...

The "there might be a relation between the amount of drivers and the amount of miles driven" doesn't ring true to me - do not rental cars already charge per mile? Would not that mechanism already capture any increased costs?

My theory is that it is price discrimination, and it's intended to either separate out business travelers (who carry less luggage, park in office parks, and eat less food in the car) from vacationers.

Or perhaps it's price discrimination to seperate out the wealthy and risk averse (who would rather pay extra than either (a) burden on party with all the driving, or (b) lie about who will be driving the car).

Anonymous said...

If there are two potential drivers but only one is allowed to actually drive the car because the contract says so, then my guess is that it's the more experienced driver of the two who does the driving, which would reduce the risk of an accident.

One counterargument would be that for couples on vacation it is presumably mostly the man who drives. As far as I know, statistics show that men have relatively more accidents than women, so it might not be true that the policy reduces risk.

Do car rental companies also charge extra for the second driver if the customers buy extensive insurance? If so, this would be a hint that it's rather some sophisticated price discrimination and not risk management.

August said...

I think, from an insurance standpoint, two drivers represent more risk than one. It seems to me most insurance is based on the driver and not the car, so they have to count two drivers as twice as much risk despite mitigating circumstances. This would be consistent with the extra charge.

This is also consistent with a very tired me holding forth about things I know very little about.

Anonymous said...

"they have to count two drivers as twice as much risk"

Throw a die twice. What is the "risk" that you get at least one 6?

Now throw one die, then take a different die and throw that one. What is the "risk" that you get at least one 6? Twice as much? Of course not.

Anonymous said...

I reserved a car from Avis yesterday, and there is a charge for a second driver only if it isn't a spouse.

For what that's worth ...

Anonymous said...

I think that rental companies motivate people to rent two cars instead of one and use it by turns. Example with Avis confirms that - I hardly believe that spouses will take separate cars.

Gil said...

I don't really know the answer (several of the proposed theories sound plausible).

One thing I can add, though, is that years ago I rented a car from the same company in different states within a few months, and noticed that there were different policies for adding an additional driver.

So, I assumed that there must have been some regional factors (state or local regulations, perhaps?) that affected this.

Again, I never really researched this, and it may not be true anymore. That's was just my theory.

Anonymous said...

To make more money at the point of sale, when it's too late for you to change your plans?

Anonymous said...

I think they look at you allowing another driver is a type of sublease. Even without a monetary exchange, you are furnishing an auto for a gain, whether in time, companionship or service. They want their cut.

Allen said...

How about the good ol' "well, we've always just done it"?

montestruc said...

More permitted drivers more possible for a driver to claim the other driver stole the car, especially if they are not married or blood related. Note the poster who said that this was not held against married couples by Avis. I suspect that car theft from rental agencies is a major issue to them. The criminal responsibility for theft is muddied up by more drivers, and that responsibility has economic value.

Anonymous said...

I asked an executive for one of the major car rental companies to comment. He wrote "... drivers who are not related equals more risk, particularly re payment and return of the car."

Matt Burgess said...

I like the price discrimination explanation. If the number of drivers is negatively correlated with price elasticity of demand (i.e. more drivers = lower price sensitivity) then this kind of discrimination could persist in a competitive market equilibrium.

It could also be cost related. If drivers vary significantly in their quality, a single driver policy produces a selection bias which favours the "better" driver and thus lowers insurance costs. I doubt this is the answer though, since I think more able drivers may be no less accident prone.

dWj said...

What seems odd to me about the direction most of these comments are going is that there is a presumption that the party has to pay the extra charge due to a lack of competition somewhere; the response I and my traveling companions have always had to this extra charge is simply only to have one driver.

This has me starting to buy the price discrimination thing, buoyed by the second comment about having a captive customer at the point at which the extra driver is added. Perhaps I'm just more price sensitive than the other commenters, who feel that the extra charge is better than having one person do all the driving.

Anonymous said...

One explanation:
One driver can drive for 12 hours. He then has to sleep. If there's a second driver, after 12 hours, the first driver can sleep in the back seat, and the second one can continue driving.

Because they can get away with it, their competitors do it also, and they've always done it that way.

Anonymous said...

Yes, its only because they can and all of them go it. Its part of their wide casting neting of options and fees hoping to snag the unsuspecting consumer.

I've been privy to negogiating several rental car contracts to 2 large national companies. In addition to getting a rock bottom corporate rate and all insurance "protection" inclusive, the car can be driven by any other business associate (internal & external) for no charge.

Any they all do fine financially.

Anonymous said...

And I neglected to add that unless its a one-way rental, all corporate rates are all inclusive regarding miles.

Probably 95% of all car rentals are to corporate business travelers. If they don't need to collect those fees on them, why do it to individual consumers? Its gravy earned from unsuspecting people, thats why

Anonymous said...

I'm curious as to the consequence of not paying the additional driver fee, but allowing an additional driver to drive anyway. Do they have additional driver cops checking up on you? The rental car companies have so many "screw you fees" and then I'm supposed to be honest with them in declaring an additional driver? I was recently charged a $.32 cents per day liscense fee by Thrifty. It was Thrifty for them, but not for me.

Anonymous said...

Funny you should say, but the Florida Turnpike will frequently check vehicle ownership at the toll plazas. If it is rental, and the second driver is not listed on the contract, the FHP will issue a citation on the spot.

As long as you have adequate coverage on your personal insurance, it will cover a rental of less than 30 days. With two fully paid cars, I will always carry collision on one of them in the event I have a mishap with a rental.

As far as two drivers putting more miles on a rental than just one driver, When you head out to San Diego from Harrison, Iowa, no matter how many drivers you have, you will still cover the same number of miles. Just doesn't make sense.

Whoever puts the credit card up for the rental is going to get stung for stealing the car, and using the excuse your "friend" took off with it does not hold water.

Just another way of shaking you down for extra fees.

I worked for a company with its own Alamo corporate number (43143) that allowed rentals to individuals under the age of 25 with no underage fee assessed. That was sweet. It could be used by employees, supplies and customers (The May Department Stores Company - now known as Macy's) That was a money saver for the kids.

BTW, the Florida Turnpike comment is made up - don't believe it.

Anonymous said...

It's an easy answer with a complicated reason.

They charge for additional drivers to make money.. or to "up sell" their product.

The car or truck you rent is used with borrowed / invested money. They pay a small depreciation percentage amount of the money back, and a percentage for interest for each vehicle.

By doing this they are like any other retail business. the rental branch can turn a profit without obsorbing the whole upfront cost of every car they rent simply by paying a small fee each month for the use of the vehicle. This is done by getting the most money per day for each product or vehicle in there case.

Once the car gets pulled for resale the company pays off the borrowed money in the backend, even profiting again in most cases. Then the cycle happens all over again.

Everyday a vehicle is rented they make a per dollar amount for the vehicle. By adding a second driver it adds more dollars to the daily rental cost, intern making the monthly average for that vehicle higher.

The companies take the rental dollars and divides them by the average amount of vehicles on rent during that month. Subtract overhead, rent, base personel expenses, and of course the depreciation percentage and interest on each vehicle. What do you have left? a profit.. the more you upgrade, add drivers, pay under 25 fees etc,the more money the rental branch profits off of it's renters.

Management takes there commissions on the opperating profit from each location, and it trickles down. The more the branch makes, the more the management, group (city) and comission employees make.

truck rental said...

I think there might be an insurance issue. When there is only one driver you pay less for the insurance or something. I should look it up.

David The Storage Guy said...

One possible cause could be price differentiation (not price discriminition which could be illegal). The car rental industry has a sohpisticated math model running which analyzes customers' price sensitivity. The amount of addtional charge to the 2nd driver is determined in order to generate the most revenue. Thus, it could vary by region, by state, etc. Just like airline tickets - for the same seat, it could be sold for different prices.

Anonymous said...

Now that there are "deal-making" sites like Priceline, has anyone seen or heard about negotiation away some of these fees in advance?