Optimal online channel strategies for a hotel considering direct booking and cooperation with an online travel agent

• DOI: http://doi.org/10.1111/itor.12470
• Published date: 01 May 2019
• Author: Fei Ye,Yongzhong Wu,Hui Yan
• Date: 01 May 2019

Intl. Trans. in Op. Res. 26 (2019) 968–998

DOI: 10.1111/itor.12470

INTERNATIONAL

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IN OPERATIONAL

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Optimal online channel strategies for a hotel considering direct

booking and cooperation with an online travel agent

Fei Ye, Hui Yan and Yongzhong Wu∗

School of Business Administration, South China University of Technology, No. 381 Five Mountain Road, Guangzhou

510640, China

E-mail: yefei@scut.edu.cn [Ye]; yanhuiboy@163.com [Yan]; bm_wyz@scut.edu.cn [Wu]

Received 25 November2016; received in revised form 9 July 2017; accepted 10 September 2017

Abstract

This paper studies the channel strategies for a hotel considering alternative online distribution channels. The

decision for the hotel involveswhether to rely on direct booking via its official website or cooperating with an

online travelagent (OTA), and if the latter is suggested, whatbusiness model to be adopted for the cooperation

with the OTA. Threemathematical models, i.e., direct booking model, OTA merchant model, and OTAagent

model, are developed to evaluatethe costs and benefits in the three different cases.The negotiation process in

the OTAagent model is studied by using the generalized Nash bargaining solution. The optimal decisions and

profits are analyzed with respect to the values of keyparameters. Results of numerical examples are discussed

to show the implications of the established models.

Keywords:supply chain management; channel strategy; bargaining; online travel agent

1. Introduction

Due to the rapid development of informationtechnology, it has been common nowadays for people

to plan their traveling services online. About 80% of the travelers use the internet to search for

hotel information (Toh et al., 2011). Besides hotels’ official websites, booking via the online travel

agencies (OTAs) has become very popular. Since the launch of Expedia in 1996, Priceline in 1997,

Hotwire in 2000, and the introduction of many other OTAs, the landscape for hotel distribution

channels has changed drastically. OTAs have taken a substantial share from traditional contracted

booking channels, mainly wholesalers and tour operators.

In the beginning, most hotels were keen to cooperate with OTAs to improve occupancy rates and

maximize profit. Much research focuses on revenue management forhotels cooperating with OTAs.

For example, Koide and Ishii (2005), Sierag et al. (2015), and Chua et al. (2016) present models

studying hotel room allocations with early-discount, cancellation, and overbooking facilitated by

OTAs. Ling et al. (2015) propose a method for hotels to cooperate with an OTA by managing the

∗Corresponding author.

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies

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

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F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 968–998 969

availability of hotel rooms for the OTA to maximize their profit. Van der Rest et al. (2016) study

how the position of a hotel on the OTA’s search page influences the likelihood of being booked.

While OTAsundoubtedly gain high exposure to customers, their services do take a significant bite

out of the profit for hotels (Gazzoli et al., 2008). It is reported that OTAs typically receive a 15% to

20% commission on booking in the United States (Scott, 2015). Forthis reason, OTAs have become

a hot potato for hotels in recent years. Some hotels consider reducing or even avoiding the reliance

on OTAs through efforts to increase direct bookings. Hotels like Hilton, Marriott, and Hyatt spent

much effort and money on marketing direct bookings and loyalty in 2016. Similar campaigns have

been taken by other hotels, including InterContinental Hotels and Choice Hotels.

However, there are significant difficulties for hotels to rely on the direct booking channel. First

of all, the investment in a hotel’s direct booking channel is considerable. A significant amount of

cost needs to be spent on developing and operating the official website with effective direct booking

system and customer support, promoting such direct booking channel, and relevant management

costs. Besides the cost, the limited amount of potential customers in the reach of the direct booking

channel is another issue. As an example, Room Key, founded by six major hotel chains (Choice,

Hilton, Hyatt, IHG, Marriott, and Wyndham) in 2012, was considered to be the hotels’ own travel

portal to avoid the high commission fees of OTAs. After a few years, Room Key is still facing the

difficulty of the small number of visitors compared to the common OTAs (Ting, 2016). To increase

the direct booking, the hotels need to spend great efforts in marketing practices likeloyalty programs

to foster the customer relationship. Fatma and Rahman (2017) suggest that hotel marketers should

even adopt a higher level of marketingpractices such as ethically responsible practices and programs.

The difficulties for direct booking channel, together with the costs and benefits for cooperating

with OTAs, have influence on the optimal channel strategy for the hotel supply chain. In the

literature, much research has been conducted on the service supply chain management (Wang

et al., 2015). In particular, Canakoglu and Bilgic (2007) study a telecommunication supply chain

and find that a well-designed quantity discount contract can achieve coordination under such a

system. Hasija et al. (2008) study how a call center service provider can help achieve supply chain

coordination with different supply chain contracts. Oliveira et al. (2013) study how supply chain

contracts achieve channel coordination in the electricity industry. Most of the existing research on

channel strategies mainly focuses on the manufacturing industry. Yao and Liu (2003) develop a

dynamic channel diffusion model between an e-tail (online) channel and a retail (offline) channel.

Dr`

eze and Bell (2003) consider a model with a retailer and a manufacturer, and compare the effects

of two different contractual arrangements for trade promotions. Chen and Bell (2011) structure a

Stackelberg model with a manufacturer and a retailer, and study the case of buyback policies and

customer returns. Yan (2015) study the decision problem of joint pricing and product quality in a

decentralized supply chain with one manufacturer and one retailer. Yao and Liu (2005) study the

price competition between regular retail distribution channels and e-tail distributionchannels under

the Stackelberg and the Bertrand model. Cai (2010) provides comparisons among four models of

channel selection, including single-channel and dual-channel models.

When a hotel chooses to cooperate with an OTA, it needs to decide which cooperating mode to be

adopted. The cooperating modes between the hotel and the OTA include agent model and merchant

model. Forexample, Orbitz is solely using merchant model and Booking is solely using agent model.

Most OTAs, including Expedia, Hotel, and Lastminute, are using both models when cooperating

with hotels (Lee et al., 2013). With a merchant model, a wholesale contract is formed where the

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation of OperationalResearch Societies