Personal protective equipment, government-issued relief programs, protests, hospital overflows, and social distancing are just a few of effects we’ve seen during the COVID-19 pandemic. But we can add one more devastation to the list—the bankruptcy of Hertz, the major car rental firm.
What was the market structure?
The rental car market was dominated by a few major firms:
The Herfindahl-Hirschman index for the rental car market is approximately 4,060. The market is dominated by a few large firms, so the rental car market is an oligopoly.
What happened to demand?
As social isolation was recommended to people and international travel became heavily restricted, the demand for rental cars decreased.
Why did Hertz exit the market?
Initially, the rental car market could sustain a natural oligopoly with three large firms. But when the demand decreased, the market could only sustain two. Hertz filed for bankruptcy and exited the market.
What will happen in the market for used cars?
With no profitable use for its stock of 700,000 cars, Hertz is selling them in the used cars market. An increase in the supply of used cars creates a surplus, which lowers their prices. By the law of market forces, a new equilibrium emerges at a lower equilibrium price and more cars are sold. Hertz’s used cars are reportedly selling for between 10% and 14% off right now.
Let’s look at a graph of the car rental oligopoly.
Now take a short quiz to check that you understand what you just read.
Multiple Choice Test: The COVID-induced Hertz Bankruptcy