An Inventory Depletion Overbooking Model For the Hotel Industry

Abstract

Travelers who have no intention of showing up often fail to cancel their hotel reservations in a timely manner. Because of this tendency, hotels in turn protect their revenue-generating but highly perishable inventory of rooms by overbooking in anticipation of no-shows and late cancellations. Unfortunately, the literature and a recent survey of hotels indicate that hotel overbooking levels are largely set by trial and error and may lead either to oversales and displaced guests or to an unprofitably high number of empty rooms and lost revenues. This study examines the institutional parameters and operating constraints of the hotel industry and treats overbooking as an inventory problem of fixed supply and variable demand, and proposes a statistically derived inventory depletion overbooking model that judiciously balances the opportunity cost of empty rooms with the adverse consequences of oversales. The model thus allows hotel managers to systematically establish optimal booking levels.