Bike Rental vs. Car Rental
By Arnold Kling
Russ Roberts poses the question.
Why is that you can rent a car for less than $20 a day, but renting a bike costs $10 an hour?
I don’t think it’s the case that the bicycle rental business is spectacularly profitable, with major barriers to entry. So here are some possibilities.
1. Labor costs are a much higher percentage of cost in a bike rental business. Suppose that it takes 15 minutes of labor time to deal with either a car customer or bike customer. Call that a $4 labor cost per customer. If the car customer keeps the car for 3 days and the bike customer keeps the car for 2 hours, then even at the numbers that Russ poses you get $60 from the car customer and $20 from the bike customer. Per dollar of revenue, labor costs are three times higher in the bike rental shop.
Looking at the investments that car rental companies make in automated systems for processing rentals, it seems to me that they must care about keeping labor costs per rental low. I infer that this is a factor that matters.
2. My guess is that a bike spends much more time than a car not earning any revenue. In some locations, people only rent bikes in the summer. In most locations, they rent more on weekends than on other days. During the day, the proportion of bikes that are rented out probably peaks somewhere around 1 PM, with much less demand before 10 AM and after 4 PM. Demand falls to zero when it’s raining or it’s too hot.
Suppose that the bike on average gets rented for 40 days out of the year, once a day, for 2 hours, at $10 an hour. That is $800 in revenue per year, minus 10 hours of labor cost, so make that $700 per year. If the bike costs $1000 (bikes are surprisingly expensive), and it last three years, that is a decent profit, but nothing spectacular.
3. I do not think that Russ has posed a car rental price that approximates the average. If a car rented for $20 a day, then even if it were utilized 350 days out of the year it would bring in just $7000. That might not even cover depreciation.
Instead, my guess is that the average rental rate is closer to three times that. The occasional bargain rates are a tool that rental car companies use to keep utilization rates high. By the same token, the same bike rental place that charges $10 for an hour will charge just $40 for a full day, because that reduces the idle time of the bike and the labor cost per customer. Price discrimination explains everything. Russ is citing the low side of price discrimination in car rentals and the high side of price discrimination in bike rentals.
4. I think that car rental companies are able to negotiate better prices on fleet purchases than bike rental stores can. Car rental companies make up a bigger portion of overall demand, and the car rental industry is more concentrated.
Suppose that the car rental company gets a car for $32,000 that retails for $35,000. If the car’s value in the used car market drops to $25,000 after one year, the car rental company sees depreciation of only $7,000.
Overall, I think that the most important relative cost factor is (2). The next most important factor probably is (4), followed by (1). What I am suggesting in (3) is that price discrimination explains the difference in the extreme prices Russ is citing–my conjecture i s that average price differences are lower than the ones he posed.