OPRE 6377. 6377. DemReMan DemReMan : Intr Introduc oduction tion
1 Hom Homewo ework rk Que Questio stions ns and Ans Answer werss 1. Car Car ren enta tall pr pric ices es ar aree dy dyna nami mic. c. For ex exam ampl ple, e, afte afterr yo you u ren entt a ca carr fo forr yo your ur ne next xt tr trip ip at a ce cert rtai ain n pr pric ice, e, you may find out a few days later that the rental price is dropping. To avoid this a consumer may delay his rentals until the last day before his trip. a) One of the risks risks in del delayi aying ng a re rental ntal is that the prices prices may increas increase. e. Wha Whatt is anot another her risk of delaying the rental? Answer: Stock out risk b) Unlike business passengers, leisure passengers buy their airline tickets well in advance of their departure. Both business and leisure customers rent their cars a few days in advance. Knowing this, airlines tend to increase ticket prices towards the departure day. Explain, if this tendency will be stronger or weaker with rental car companies. Answer: Answe r: Busin Business ess customers customers can pay more and they are likel likely y to buy airline airline tickets later so airlines airli nes increase increase prices. Busin Business ess and leisure customers customers rent about the same time. Renta Rentall car companies cannot distinguish between business and leisure customers by looking at the time of reservation. Hence, the tendency will be less. 2. [AutoSlash] Observing that there are some instances where the car rental price dropped towards the rental day, day, AutoSlas AutoSlash h decided to offe offerr a servi service ce of re-p re-pricing ricing.. Quotin Quoting g from a real-world real-world example of re-pricing from their website: Let’s say you book a one-w one-week eek rental rental Las Vegas Vegas via AutoSlash for $210. Within a few hours of booking, you receive an email from AutoSlash notifying you that we were able to find a disco discount unt to lower your rate to $180. We automatically automatically re-booked re-booked you at the lower rate, and you’ve just saved $30 without even lifting a finger. A few days go by, by, and you find another another email from AutoSlash. AutoSlash. This time, we let you know that we detected a price drop for your rental. rental. The rate has dropped from from $180 to $165, and weve saved you another $15. AutoSlash rents cars and receives commissions from the car rental companies. Its business model is similar to that of Expedia. a) There is no service fee for re-pricing. re-pricing. Does this mean that consumer can confidently confidently use AutoSlash? What should they be careful of? Answer: Answe r: Wheth Whether er AutoSlash AutoSlash quotes exactly the same prices as those of car rental companies companies and whether whether it can rent cars from all car rental companies. companies. Also, recent customers’ customers’ feedbacks feedbacks can be important, too. b) Suppose that consumers are confident with AutoSlash and use it frequently frequently,, how would car rental ren tal companies respond respond to this change with their rent rental al fees? In particular, particular, will rental prices become more dynamic or less dynamic? Answer: less dynamic c) Suppose that the car rental companies companies decide to make rental prices prices less dynami dynamic, c, how will the value AutoSlash offers to customers change? In particular, will customers value re-pricing service 1
more or less? Answer: They value it less. AutoSlash can become a victim of its success. 3. DTU (Dallas Technology University) is a leading school in Texas. It offers a supply chain master degree and charges $80 K for the degree. The expected lifetime earnings increase after getting this degree is $500 K. The cost of educating a single master student at DTU over the 2 year degree is $50 K. On the other hand, NTU (New Technology University) offers a similar master degree which leads to an expected lifetime earning increase of $300 K. Suppose that NTU’s cost is also $50 K for educating a master student. a) DTU competes with NTU for master students and wants to reconsider its $80 K fee for the master degree. DTU knows NTU’s costs and the expected lifetime earnings increase for the master students. DTU does not know how much NTU exactly charges for its master degree but estimates that the charge is about the cost of $50K. What should the new DTU fee be in order not to lose potential students to NTU? To answer this question, consider the marginal benefit of getting a master from DTU as opposed to NTU. Answer: which is $200 K = 500-300. Charge 200 + 50 K b) DTU quickly learns that NTU charges $70 K for its master. Given this price, what is the maximum price DTU can charge and remain competitive. Answer: Charge 200+70 K c) The prices above are driven by the expected lifetime earning increase. This information is hard to get and is substituted by annual starting salaries upon graduation. Describe how expected lifetime earning increase can be computed from starting salaries. Answer: Expected lifetime earning increases can be estimated as: (Expected work years till retirement) × (present value of annual salary at graduation). Or a similar formula can be written to reflect expected annual salary increases. For example: years to retire Expected lifetime earnings =(Annual salary) ×
∑
(1 + % salary increase )i .
i=0
4. Recall cost based pricing, market based pricing and value based pricing discussion. Consider the DTU fee discussed above. Explain how should DTU set the fee if it is using a) Cost based pricing. Answer: Suppose the margin DTU aimed at is 50%. For cost based pricing, DTU should charge at 50*(1+50%)=75k. b) Market based pricing. Answer: For market based pricing, DTU should set price the same as the market price. Suppose the market price is 70k, then DTU also should price at 70k. c) Value based pricing. Answer: For value based pricing, based on the expected lifetime earning increase for the student, DTU should charge at 500k.
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