Friday, July 28, 2006

Economics Lesson about Oil

Please read this great post from a Senior Lecturer in Economics at Northwestern University.

Then, please, read my comments below:

Dear Prof Kiesling:

As a traveling salesman with an economics degree, one of the hardest things to listen to (and keep the ole trap shut) on the rental-car shuttle bus is the price of gas...what people pay for self-service, and what they have to pay the greedy Hertz-Avis-National monopoly (ok, oligopoly, but that's lost on them). Folks DO have choices in price; look at $3.19 for self-serve in Wisconsin, vs $6.00 if Hertz fills the tank for you. This would seem to be the easiest example of how competition could drive pricing down...but NOOOOOO. It's all about greed on the part of Pick-a-Rental, right?

In fact, people make a conscious choice to be LAZY and/or let the employer pick up the price differential in the gas from the rental-car company. "What do I care? It's not coming out of MY pocket." Here is where the old example of employer-paid health insurance comes into play. If your company pays the insurance premium, and you only have a small deductible, what incentive do you have to ask about the price of the MRI when you've only strained your knee? Similarly, what incentives are there for rental companies to lower the price of gas if people pay the going rate, and the employer gets stuck with the bill? I would argue that it is not the oil companies or the rental firms that are being uncompetitive; it's the CFO and Sales VP that approve of the expense who are the real enemies of competition.

Oh well, have to run to turn in the rental car and catch a flight. $6.35 here...but, not my problem...

Meanwhile, back at Camp Inelastic...


Texan in Wisconsin

HAT TIP: National Review Online and Knowledge Problem

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