Pricing Reservations: A General Equilibrium Approach

Abstract

Even with many decades of experience with booking and reservations, managers in the hotel industry still face substantial challenges predicting future room demand. Using a general equilibrium approach, this paper provides a new reservation pricing method. By establishing a price for the reservation that is based on the traveler’s best estimate of whether she will actually occupy the room, the hotelier gains information about how likely it is that the room will be sold. The price of the reservation increases as the traveler’s certainty of travel increases. At the same time, the room rate decreases according to likelihood that the traveler will actually occupy that room. This approach therefore provides a mechanism by which hotel managers can obtain more accurate information regarding future room demand and potential guests can gain a more favorable rate in exchange for revealing the critical information regarding their trip. With this information, the hotel can focus its revenue management system more sharply and does not have to rely solely on historic ratios to predict room occupancy.

Keywords: reservation, hotel demand, revenue management, service