Optimal Pricing and Overbooking of Reservations
Production and Operations Management · 2022 · Volume 31 · Issue 3
Abstract
We study the optimal design of reservations for a firm with limited capacity. The firm faces a random number of customers, each of whom has a random valuation for service. The reservation policy has two components: pricing and overbooking. For the former, the firm charges a reservation fee (at the time of reservation) and a service price (at the time of service). For the latter, the firm imposes a booking limit that caps the number of reservations it sells. Given the firm's reservation policy, customers make reservations in advance and later decide whether to show up. Denying service to reservation holders is costly. We obtain the following equilibrium results. First, when demand is small relative to capacity, the firm's pricing structure relies on reservation fees prepaid in advance, but when demand is large relative to capacity, it relies on payment received upon service. Second, when demand is low and/or predictable, the firm accepts all reservation requests, but when demand is high and/or variable, the firm uses a booking limit.
Keywords
pricing, overbooking, reservations, revenue management, advance selling, capacity
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