A comparison of the merchant and agency models in the hotel industry

• Author: Xiaoli Wu,Peng Liao,Fei Ye
• DOI: http://doi.org/10.1111/itor.12365
• Published date: 01 May 2019
• Date: 01 May 2019

Intl. Trans. in Op. Res. 26 (2019) 1052–1073

DOI: 10.1111/itor.12365

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

A comparison of the merchant and agency models in the hotel

industry

Peng Liaoa,b,FeiYe

band Xiaoli Wub

aDepartment of Logistics and Maritime Studies, Hong Kong Polytechnic University, Guangzhou, China

bDepartment of Industrial Engineering, South China Universityof Technology, Guangzhou, China

E-mail: 13900168r@connect.polyu.hk [Liao]; yefei@scut.edu.cn [Ye]; wxiaoli@scut.edu.cn [Wu]

Received 11 March 2016; receivedin revised form 8 October 2016; accepted 18 October 2016

Abstract

In addition to a hotel’sdirect sales channel, the hotel can choose whether to use the online travel agency (OTA)

channel, and run a dual-channel distribution system. For the hotel, selling rooms through OTA expands the

available market, but comes atsome expense, such as fewer allocated rooms for its owndirect channel. In this

paper, we formulate a theoretical game model to analyze the impact of various parameters on the channel

and pricing decisions. We also compare the impact of form of contract, wherethe contract between hotel and

OTA can be based on either the merchant or agency model. We show the impact of capacity on the hotel’s

channel choice. In the dual-channel system, we find thatthe OTA prefers the agency model over the merchant

model when the hotel’scapacity is small. We also propose a revenue-sharing contract that can achieve channel

coordination for both hotel and OTA retailers under both models.

Keywords:online travel agency; dual channel; game theory; revenue management

1. Introduction

1.1. Background and highlights of this study

Nowadays, online early discount services have attracted a lot of attention in the hotel industry.

Online travel agency (OTA) retailers, exemplified by Ctrip.com, Expedia.com, and Orbitz.com,

have emerged as online alternatives to the traditional channels through which hotels offer their

rooms to customers. Contracting with the OTA channel facilitates market segmentation and price

discrimination, and allows for disposal of excess capacity after meeting offline travel demand.

However, if the OTA is an independent entity, it retains a portion of the revenue generated from

online consumers.

C

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Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

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P. Liao et al. / Intl. Trans. in Op. Res. 26 (2019) 1052–1073 1053

Tabl e 1

Key differences between the agency and merchantmodels

Agency model Merchant model

First mover OTA decides the commission rate Hotel decides the wholesale price

Quantity of rooms

allocated to the

OTA channel

Hotel decides the allocation by

controlling the OTAchannel price

OTA purchases a numberof rooms at

a given wholesale price

Decision maker

regarding OTA

channel price

Hotel OTA

In the hotel industry,the agency and merchant models are the main forms of cooperation between

hotel and OTA. For example, the main business of Expedia.com, using the agency model, works as

follows:

Under the agency model, Expedia, Inc. acts as an agent in the transaction, passing reser-

vations booked by its customers to the relevant airline, hotel, car rental company or cruise

line. Expedia, Inc. receives a commission or ticketing fee from the travel supplier for its

services under the agency model. In agency transactions the supplier sets the price to be

paid by the consumer and the travel supplier appears as merchant of record for the trans-

action. Agency revenues are derived primarily from commissions and ticketing fees from

travel suppliers, revenues from GDSs (global distribution system) and fees from leisure and

corporate travelers. Agency revenues are typically recognized at the time the reservation is

booked.1

Expedia, however, does also use the merchant model, through which hotels sell rooms at a

wholesale price to Expedia and the online price of rooms is determined by Expedia. This form

of business brings a large share of Expedia’s revenue. Expedia’s annual report highlights that the

merchant model works as follows:

As merchant of record, we generally have certain latitude to establish prices charged to trav-

elers (as compared to agency transactions). Also, we generally negotiate supply allocation

and pricing with our suppliers.2

We summarize the major differences between the agency and merchant models in Table 1. Some

clearing-house models such as “Last-Minute Sale” or “Posted-Price Sale” or “Name Your Own

Price” (NYOP) are essential forms of the merchant model. Generally, the agency model is the

dominant form of the cooperation between OTA and hotels, because the hotel can control the

online price, and the negotiation between the OTA and hotels can be performed on an E-booking

platform, which is more convenient than the merchant model, in which the negotiation is done

through offline communication. Why, then, do OTAs also use the merchant model in some cases?

This paper suggests an answer.

1http://press.expediainc.com/index.php?s=43&item=15

2http://www.analist.be/reports/Expedia_International_2008.pdf

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation of OperationalResearch Societies