When economists talk about supply and demand, they usually discuss prices of “related goods” as one of the determinants of demand for an item. (see here for a video.) Related goods can be either substitutes- things that are consumed instead of one another- or complements- things that are consumed together. In other words, substitutes would be things like tea and coffee, and complements would be things like (hopefully, at least) left shoes and right shoes. More precisely, we can think about complements in one of the following ways:
- All else being equal, the marginal utility (read, how useful one more of something is to you) of goods gets higher when you own goods that are complementary to them
- All else being equal, when the price of an item decreases, demand for complementary goods increases
If the relationship is strong enough, it could be the case that the increase in demand is large enough that it would be profitable to artificially lower the price of an item in order to drive demand for its complements. In Economics 101, we usually think about different goods being produced and sold by different companies. In this setup, it is reasonably difficult for one company to subsidize another company’s product in order to increase its own sales, but it’s not impossible. (Just ask Apple and AT&T, for example.) When all the products are sold by the same company, it is much easier. Behold:
In this setup, the car rental company (if you can call it that) is probably either just breaking even or taking a small loss on the rental itself so that it has a captive audience to sell complementary goods to. The logic is that it’s easy and profitable enough to convince people at the point of sale to purchase the add-ons or hope that people will be in a hurry and resort to paying for the fuel fill up that it’s worth using the cars as bait to get people in the door in the first place. Given the exorbitant prices on both supplemental insurance and rental car gas, they’re probably right. As an economist, I’m still perplexed that no one has opened an insurance and gas kiosk in the rental car area, since this person would almost certainly be able to beat the rental car companies’ prices and still be profitable. (Venture capital, anyone?) As a consumer, I’m glad to some degree that this hasn’t happened, since if rental cars ceased to be used as loss leaders, my no-frills rental car would get more expensive.
For the record, I am also Amazon’s worst customer in that I own 50 or so Kindle books and no Kindle. I suppose the lesson to be had is that informed consumers can get good deals when companies are trying to exploit the loss leader strategy…or at least they can as long as not too many people have the same idea.