Reservation Policies in Queues: Advance Deposits, Spot Prices, and Capacity Allocation
Production and Operations Management · 2018 · Volume 27 · Issue 4
Abstract
At firms such as restaurants, customers either make reservations in advance or join queues on the spot. Reservation holders may not show up, and walk-ins have to wait. Using a game-theoretic model between the firm and customers, this paper studies the following: (i) reservation deposits and service prices, and (ii) capacity allocation between reservations and walk-ins. We have three main results: (i) When reservation no-shows lead to wasted capacity that cannot be reallocated, the firm should front-load all charges into the reservation deposit; (ii) The firm should charge a lower service price to reservation-holders than to walk-in customers when it decides to serve both; (iii) Less capacity should be allocated for reservations as the potential market size grows; with sufficiently large potential demand, the firm should stop taking reservations. Our results follow from key operational tradeoffs between reservations and queues: reservations permit 100% utilization, but queues operate at less than 100%; however, reservations have constant returns to scale, while queues enjoy increasing returns.
Keywords
revenue management, pricing, advance selling, service queues
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