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Pricing Strategies for Firms with Market Power

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You own a franchise of rental car agencies in Florida. You recently read a report indicating that about 80 percent of all tourists visit Florida during the winter months in any given year, and that 60 percent of all tourists traveling to Florida by air rent automobiles. Travelers not planning ahead often have great difficulty finding rental cars due to high demand. However, during nonwinter months tourism drops dramatically and travelers have no problem securing rental car reservations. Determine the optimal pricing strategy, and explain why it is the best pricing strategy.

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Solution Preview

The optimal pricing strategy is to have premium pricing during the winter months and low pricing during non-winter months.
The reason for a premium pricing strategy during the winter months is that since (0.6 X 0.8 = 0.32) 32% of all tourists travelling to Florida demand require cars during the winter months, the demand for rental cars is high during the winter months. It is as if the demand curve has shifted to the right, which is a larger quantity of car rentals are demanded at the same price during the winter ...

Solution Summary

The explanation discuses market power and price elasticity in terms of profit maximization to come up with an optimal pricing strategy for rental car companies in Florida where there is high demand in the winter.