Optimal overbooking decision for a “Hotel + OTA” dual‐channel supply chain

• Author: Murui Lu,Yina Li,Fei Ye
• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/itor.12486
• Date: 01 May 2019

Intl. Trans. in Op. Res. 26 (2019) 999–1024

DOI: 10.1111/itor.12486

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Optimal overbooking decision for a “Hotel +OTA”

dual-channel supply chain

Fei Ye, Murui Lu and Yina Li∗

School of Business Administration, South China University of Technology, Wushan Road,Tianhe District, Guangzhou

City, No.381, Guangzhou 510640, China

E-mail: yefei@scut.edu.cn [Ye]; 1053087249@qq.com [Lu]; bmliyina@scut.edu.cn [Li]

Received 21 April 2017; received in revised form 17 October 2017; accepted 25 October 2017

Abstract

The overbooking problem with free upgrade substitution for a “Hotel +OTA (online travel agent)” dual-

channel supply chain is investigated. Under the Merchant model framework, the OTA’s optimal purchas-

ing quantity and the hotel’s optimal overbooking level and strategy are analyzed. The findings reveal that

a substitutable overbooking strategy (free upgrade is permitted) is the best for the hotel. However, the

optimal decisions depend on parameters such as wholesale price, arrival rate of economy room’s con-

sumers, the probability of consumers persuaded to book luxury room, and demand uncertainties in two

channels. The OTA’s purchasing quantity for economy room decreases in wholesale price, the probability

of consumers persuaded to book luxury rooms, and OTA channel demand uncertainty. The hotel’s op-

timal overbooking level decreases in the arrival rate of economy room’s consumers and the probability

of consumers persuaded to book luxury room and increases in wholesale price and hotel direct chan-

nel demand uncertainty. Moreover, the hotel can affect the OTA’s purchasing quantity decisions by ad-

justing wholesale prices and determine the optimal overbooking level to maximize the expected revenue

accordingly.

Keywords:yield management; overbooking; free upgrade substitution; dual-channel

1. Introduction

Overbooking is a technique of selling goods or services in excess of the availablecapacity for the same

period to hedge against the capacity idleness caused by cancellationsand no shows (Guo et al., 2016;

Wannakrairot and Phumchusri, 2016). It is a revenue management strategy that helps to maximize

the total capacity to 100% occupancy and increase the expected revenue, and is perceived as a

low-risk and high-reward technique by the majority of hospitality and tourism managers (Pizem,

∗Corresponding author

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1000 F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 999–1024

2017). The advantage of overbooking is particularly important given the “perishable” nature of

hospitality and tourism products: the revenue from the service products cannot be recaptured once

the service is not sold on the target date. It was found that a well-managed overbooking system can

help to increase approximately 20% of the total revenues (Phumchusri and Maneesophon, 2014).

U.S. Airways reported that the company would have lost $1 billion of its $11.56 billion revenue if it

did not adopt overbooking (Lan et al., 2015).

However, overbookingcan also be a double-edged sword. When a service provideroverbooks and

the number of arrivals exceeds their capacity on the target date, the overflow customers are usually

denied services, resulting in customer dissatisfaction, affecting the service provider’s reputation and

causing a decline in profitability in the long run. By now, most of the world is aware of the negative

impact of the practice of overbooking because of the incident on United Airlines flight 3411 when

a medical doctor was battered and forcibly dragged off his seat by the airport police (Pizam, 2017).

Therefore, how to determine the right overbooking level has become an important issue for

hospitality and tourism managers. If the overbooking level is set too low, there is a chance that

the capacities will be spoiled due to the possible no shows or cancelations. According to the real

practices of the hotel industry, 13–15% of reservations resulted as no shows or cancelations (Xiang,

2004). If the overbooking level is set too high, there is a chance that the arrivals exceed the available

capacities, incurring service providers’ disrepute and economic losses when they have no choice but

to refuse customers. To set an optimal overbooking level, decision makers need to balance carefully

the benefit against the cost of overbooking.

Many studies in the literaturehave investigatedhow service providers set appropriateoverbooking

levels to maximize their expected revenues in hospitality and tourism industries (for details, see Sec-

tion 2). Nevertheless, the previous literature has not taken the “Hotel +OTA (online travel agent)”

dual-channel supply chain into consideration. OTA, which refers to the organizations that have no

physical outlets but provide services solely through the Internet (Booking.com, Expedia.com), has

become a very dominant channel to distribute rooms for hotel industry (Lee et al., 2013; Verhoef

et al., 2015). An increasing number of hotel chains, Hilton, for example, are selling rooms through

the OTA channel, in addition to their owndirect channel. But the extant studies related to “Hotel +

OTA” dual-channel supply chain mainly focused on pricing strategy and relationship management

(Harewood, 2008; Hua et al, 2010; Lee et al, 2013; Ye et al., 2019, 2017), ignoring the overbooking

problem of the “Hotel +OTA” dual-channel supply chain (Hadjinicola and Panayi, 1997; Koide

and Ishii, 2005; Guo et al., 2016).

In this paper, by modeling the interaction decision-making behavior betweenthe hotel and OTA,

we consider the overbooking problem with free upgrade substitution for a “Hotel +OTA” dual-

channel supply chain. We assume that a budget hotel cooperateswith an OTA to sell rooms through

dual-channel markets: a hotel direct channel and an OTA channel. The budget hotel owns tworoom

types: economy room and luxury room. The OTA determines the optimal purchasing quantity for

each room type for a given wholesale price first, then the budget hotel determines the optimal

overbooking level for the economy room under three different overbooking strategies: nonover-

booking and nonsubstitutable strategy, nonsubstitutable overbooking strategy, and substitutable

strategy. Moreover, the optimal overbooking strategy and corresponding application conditions

are analyzed. In particular, we try to answer the following questions: (a) What is the OTA’s opti-

mal purchasing quantity decision for each room type and the budget hotel’s optimal overbooking

level of economy room decision? (b) What is the budget hotel’s best overbooking strategy and its

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies