Optimal reservation policies and market segmentation

George Georgiadis, Christopher S. Tang*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

When operating in a market with heterogeneous customers, a service firm (e.g.; a car rental company or a hotel) needs to manage its capacity so as to maximize its revenue. To gauge the potential demand, a service firm often allows each customer to reserve a unit of service in advance. However, to avoid the loss associated with "no-shows", service firms may require a non-refundable deposit. To determine an optimal reservation policy with a non-refundable deposit, we consider the case in which the market is divided into four segments (high vs. low valuation and high vs. low show-up probability). When customer demand and the firms capacity are large so that they can be approximated by continuous values, we determine the optimal reservation policy analytically, and we establish analytical conditions under which the firm should discriminate against (i.e.; price out) certain customer segments. For the case when customer demand and the firms capacity are finite so that they take on discrete values, we find that some of the insights obtained from the "continuous" case continue to hold especially when the firms capacity is large. However, the key difference is that in the former case, the firm discriminates mostly based on customers valuation, whereas in the latter case it discriminates mostly based on customers show-up probability.

Original languageEnglish (US)
Pages (from-to)81-99
Number of pages19
JournalInternational Journal of Production Economics
Volume154
DOIs
StatePublished - Aug 2014

Keywords

  • Market segmentation
  • Overbooking
  • Reservation policies
  • Revenue management

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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