Optimal Reservation Policies and Market Segmentation

International Journal of Production Economics, Forthcoming

40 Pages Posted: 11 Jun 2011 Last revised: 29 May 2014

Date Written: April 16, 2014

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 firm's 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 firm's 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 firm's 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.

Keywords: Market Segmentation, Revenue Management, Overbooking, Reservation Policies

Suggested Citation

Georgiadis, George and Tang, Christopher S., Optimal Reservation Policies and Market Segmentation (April 16, 2014). International Journal of Production Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1860398 or http://dx.doi.org/10.2139/ssrn.1860398

George Georgiadis (Contact Author)

Northwestern University - Department of Management & Strategy ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/georgiadis/index.html

Christopher S. Tang

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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