Decision Sciences - 2007 - Baker - A Comparative Revenue Analysis of Hotel Yield Management Heuristics

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Decision Sciences
Volume 30 Number I
Winter I999
Printed in the U.S.A.
A Comparative Revenue Analysis

of Hotel Yield Management Heuristics
Timothy Kevin Baker
Bass Hotels and Resorts, Inc., Three Ravinia Drive, Suite 2900, Atlanta,
GA 30346-2149, emuil: bakeKtim@hiw.com
David A. Collier
The Ohio State University, 2100 Neil Ave., Columbus, OH 43210-1144,
email: collie~4@osu.edu
Abstract
Yield management is the dynamic pricing, overbooking, and allocation of perishable
assets across market segments in an effort to maximize short-term revenues for the firm.
Numerous optimization heuristics for allocation and overbooking exist for the airline
industry, whose perishable asset is the airplane seat. When an airplane departs, no reve-
nue is gained from the empty seat(s). In the hotel industry, the perishable asset is the
hotel room-once a room is left empty for a night, that night’s revenue cannot be recap-
tured. The literature on yield management heuristics for the hotel industry is sparse. For
the hotel operating environment, no research has adequately (1) integrated overbooking
with allocation, (2) modeled the phenomenon of hotel patrons extending or contracting
their stay at a moment’s notice, or (3) performed a realistic performance comparison of
alternative heuristics.
This research develops (1) two hotel-specific algorithms that both integrate over-
booking with the allocation decisions, (2) a simulation model to reproduce realistic
hotel operating environments, and (3) compares the performance of five heuristics
under 36 realistic hotel operating environments. Seven conclusions are reached with
regard to which heuristic(s) perform best in specific operating environments. Generally,
heuristic selection is very much dependent on the hotel operating environment. A coun-
terintuitive result is that in many operating environments, the simpler heuristics work as
well as the more complex ones.
Subject Areas: Heuristics, Service Operations, and Simulation.
INTRODUCTION
Yield management is the dynamic pricing, overbooking, and allocation of perish-
able assets across market segments in an effort to maximize short-term revenues
for the firm.Yield management provides some success stories and a few nonpub-
licized failures. For example, American Airlines increased its revenues by an esti-
mated $1.4 billion over the 1989-91 time frame. Net profits after taxes were $892
million during that same period (Smith, Leimkuhler, & Darrow, 1992). Hertz
239
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240 Hotel Yield Management Heuristics
rental cars, Marriott International hotels, and the Royal Caribbean Cruise Line
have also benefited from yield management implementations (Lieberman, 1992).
Hertz increased its annual revenues by 1-5% annually. Marriott improved its 1991
revenues by $25-35 million. Royal Caribbean Cruise Lines obtained a revenue
increase in excess of $20 million for one year. However, these benefits are not easy
to obtain (Hanks, Cross, & Noland, 1992; Lieberman). One hotel chain spent over
$1 million in implementing a yield management system, only to discontinue using
the system because it was not appropriate for their properties. One airline attrib-
uted losses in excess of $10 million due to errors in its yield management models.
The main objectives of this research are to: (1) develop modified heuristics
for the hotel operating environment, (2) test and compare five heuristics, and
(3) help hotel managers select the appropriate reservation control heuristic that
best suits their operating environment. These heuristics are tested under the most
realistic hotel-specific operating conditions to date. For example, the operating
environments in this research include the following realistic characteristics:
(1) room demand modeled as a Poisson process with varying demand intensities
and timing, (2) daily cancellation rates for the demand that is accepted, (3) no-
show rates, (4) errors in estimating no-show rates, ( 5 ) stayover extension-contrac-
tion levels-probabilities that the customer will extend or contract his or her stay
a certain number of days at a moment’s notice, (6) errors in estimating the stayover
extension-contraction levels, and (7) room rate differences between regular and
discount customers. These factors are defined in Tables 5 and 6, and permissible
values are listed in subsequent tables.
These factors are combined into 12 different operating environments based
on interviews with hotel managers (Hyatt, January-February 1993; Marriott,
November 1992). The operating environments are differentiated by: (1) whether
the hotel is primarily for business or resort purposes, (2) the quality of the data
needed for yield management analysis-good (bad) data implies small (large)
errors in estimating no-show rates and stay lengths, and (3) whether the primary
customers are transients, groups, or a mixture. See Table 1 for a summary of these
operating environments. When these 12 operating environments are combined
with three levels of demand intensity, 36 hotel environments are defined. Each
heuristic is tested in each operating environment and demand intensity combina-
tion to provide a realistic and complete test bed for the implementation recommen-
dations in this paper. Also, a hotel may have an operating environment that is
“between” those in Table 1 (e.g., its demand intensity may be between low and
medium). In this case, the hotel should look at all nearest operating environments,
select the best performing heuristics from those environments, and then perform
further testing on all of these heuristics.
The simulation used to test the relative performance of the heuristics defines
two customer categories and rolls forward in time day by day, performing a heu-
ristic optimization run each night for a 14-night horizon. It accepts or rejects each
reservation request based on heuristic results; performs the daily cancellations,no-
shows, stayover extensions and contractions; and collects heuristic performance
results. Tables 5-10 in the Appendix define simulation parameters and their range.
The simulation model is described in detail in Baker (1994). The simulation model
Table 1: Factor levels for a range of operating environments.
n
Factor Levels i%
Resort-Business Good-Bad Data Group-Trans-Mix B
$
No-show Actual No-show Cdf Demand Peak Revenue Demand
Operating Environmenta Level Stayover cdf Error Error Gap Gap Intensity
1. Resort-good data-groupb Low Resort Low Low Low High All 3 levels
2. Resort-good data-transc Medium Resort Low Low Low Low All 3 levels
3. Resort-good data-mixedd Low Resort Low Low High Medium All 3 levels
4. Resort-bad data-groupe Low Resort High High LOW High All 3 levels
5. Resort-bad data-trans Medium Resort High High Low Low All 3 levels
6. Resort-bad data-mixed Low Resort High High High Medium All 3 levels
7. Business-good data-group Medium Business Low Low Low High All 3 levels
8. Business-good data-trans High Business Low Low Low LOW All 3 levels
9. Business-good data-mixed Medium Business Low Low High Medium All 3 levels
10. Business-bad data-group Medium Business High High Low High All 3 levels
11. Business-bad data-trans High Business High High Low LOW All 3 levels
12. Business-bad data-mixed Medium Business High High High Medium All 3 levels
NOTES:
aA total of 36 (12x3) scenarios with 100 replications each are required to complete this experimental design.
b"Good data" implies that the no-show and cdf errors are at their low levels.
C"Trans" means that the customers are predominantly (about 80%)transient, or single, customers.
d"Mixed" means that there is roughly an even mixture of group and transient customers.
e"Bad data" implies that the errors are at their high levels.
can be modified to handle other yield management situations such as for airlines,
rental cars, cruise lines, railroads, broadcasting station advertising slot allocations,
and public utilities.
The 36 hotel operating environments defined in Table 1 and the simulation
structure used in this research accurately reflect today’s hotel operating environ-
ments. Recent studies reveal the following two new issues: (1) special events mod-
eling (Hay, February 1998), and (2) group acceptance opportunity cost estimation
(Eister, January 1998). “Special events” are days such as Valentine’s Day, where
the time series demand forecasts that are reasonably accurate for other days fall
apart. In practice, better yield management systems try to capture historical
demand activity for each unique special event, and forecast demand based solely
on that information (Mace, 1997). If this historical information is not available,
then at least hotel property management will exercise judgment to override the
time series forecast. Simulating special events would not alter the relative perfor-
mances obtained in this study.
In yield management systems that provide group acceptance opportunity
costs as an input to the hotel’s sales negotiators, group demand is forecasted sepa-
rately from transient demand (Mace, 1997). The group acceptance opportunity
costs are basically the incremental revenue that could be obtained if the group’s
block of rooms were sold to other customers. In this paper, all of the opening-clos-
ing decisions for customer categories apply to single customers. Since Eister (Jan-
uary 1998) found that transients make up a large percentage of a hotel’s customer
base and contribution to profitability, the focus of this research on single customers
is reasonable.
This paper first defines the hotel yield management problem and reviews the
relevant literature. Next, it defines the five yield management heuristics tested.
Then it compares the relative performance of these heuristics using a simulation
model and summarizes the results in seven conclusions. The paper concludes with
a discussion of the managerial implications of these results and identifies areas that
require more research.
PROBLEM D E S C R O N AND LITERATURE REVIEW

“Yield management” can be defined as an intelligent approach to the dynamic
reservation control and pricing of a perishable asset across customer types. “Res-
ervation control” is the process by which perishable assets are made available-
unavailable to customers. For example, a hotel has a fixed set of standard-sized
rooms to rent to the various customer types (Collier, 1987). These different cus-
tomer types (tourists, businesses, VIP, etc.) pay different rates, purchase different
amenities, stay different lengths of time, and make reservations at different times
in advance of the first stayover. The essence of reservation control is to systemat-
ically accept-reject reservation requests to maximize benefits to the hotel. Reser-
vation control becomes necessary when total room utilization in the hotel is high.
A general overview of yield management issues and decision support approaches
is provided by Kimes (1989).
Reservation control can be broken into “allocation” and “overbooking.”
“Allocation” involves the dynamic reservation limits placed on each category of
Baker and Collier 243
customer. These limits need to be dynamic due to the stochastic nature of customer
demand. “Overbooking” involves the limit on the total amount of rooms in excess
of the physical stock that can be sold across all types of customers at a point in
time. For example, hotels might book 10% more rooms than are available on a
given night. This is done to offset customers canceling, not showing up without
giving notice, or shortening their stay.
“Intelligent” means, ideally, net revenue maximization over the planning
horizon, where net revenue is the room and amenity revenue minus the overbook-
ing costs. Overbooking costs consist of oversale and undersale costs. Oversale
costs include (i) the expected discounted future lost business due to denying cus-
tomers with reservations a room when they show up, and (ii) the cost of securing
a room for the customer in another hotel (i.e., the room rate at the new hotel, trans-
portation expenses, and other serviceupset correction costs). The undersale oppor-
tunity cost is the room (revenue) rate for the unsold room. All other costs, such as
the property mortgage, are fixed over the short-term planning horizon (no more
than a year).
Weatherford and Bodily (1992) provided a comprehensive classification
scheme for all types of yield management problems. Using their taxonomy, the
heuristic approaches evaluated here fit the following problem: multiple market
segments, nested booking classes, fixed prices, network focus (as opposed to
focusing on a single stayover night), overbooking allowed, cancellations allowed,
no-shows allowed, and no upgrading or downgrading. In this article, we refer to
market segments and booking classes as customer categories.
Weatherford’s(1995) NDSP formulation applied to the hotel environment is
as follows:
subject to
This summation is for all cM that cover n for all nights n in the planning horizon,
plus the three extra nights after the end of the horizon (correspondingto the max-
imum length of stay).
XcLd I DcLd for all (c, L, d) combinations,
where
fCu = expected room revenue (including amenity consumption and meet-
ing room usage) for customer category c with intended length of
stay L starting on night d,
C, = rooms unallocated on night n,
D,, = mean forecasted demand from the current time until d, and
X,, = number of rooms to allocate to (c, L, d ) from now until the arrival
date (decision variable).
This research is an extension of Weatherford (1995) and Bitran and Mondschein’s
(1995) research. Weatherford (1995) used a simulation that has the same factors as
in this research, except the following are not considered: (1) stayover extensions-
contractions, (2) no-show errors, and ( 3 ) cancellations. Weatherford’s (1 995)
study modeled factor combinations into business and resort operating environ-
ments (based on a hotel’s data), but no good-bad data or group-transient-mixed dif-
ferentiation. He compared three heuristics in the test bed: first come, first served,
a modified EMSRb, and a variation of our Hotel Nested Network Method. The
modification to the Hotel Nested Network Method is to separate overbooking from
allocation, where overbooking is increasing capacities to compensate for expected
no-show rates. The base EMSRb model can be found in Belobaba (1992). Weath-
erford’s (1995) modifications to the EMSRb model were (1) accounting for no-
shows and (2) using linear program duals instead of average rates. Weatherford’s
results were that the Nested Network method performed best in most cases, with a
maximum improvement of 2.9% over other heuristics. Nested Network had the
biggest advantage in high demand intensity cases.
Bitran and Mondschein’s (1995) simulation had the same factors as this
research, except they did not consider: ( 1) stayover extensions-contractions,
(2) no-shows, and ( 3 ) cancellations. They mapped these factors into operating
environments based on data from a Chile hotel. They tested the first come, first
served heuristic, and a variation on our Nested Network method. The variations
involved (1) no overbooking and (2) solving the linear program after each cus-
tomer request, so that accept-reject decisions could be based on the primal solu-
tion. The results were that their Nested Network method outperformed the first
come, first served method by 10-20% in revenue gained. Bitran and Mondschein
also developed an optimal allocation approach to the one-night stay problem,
whereas we are concerned with the more realistic multiple-night stay environment.
The mathematical models used for allocation and overbooking in the airline
industry (e.g., see Curry, 1990; Williamson, 1992; and Smith et al., 1992) are sim-
ilar to those used in the hotel industry, except for two key differences. First, origin-
destination pairs for airline customers typically involve no more than three legs,
with origin-destination pairs hooking up with each other at all stops. The hotel net-
work is different, in that seven-consecutive-night stays are not uncommon, cus-
tomers with different arrival dates or stay lengths overlap with each other, and one
day feeds into the next. A second major difference is that cancellation and no-show
rates are typically much higher in the airline industry (Marriott, November 1992;
Smith eta].)
In this research, the Nested Network Method adds overbooking to the usual
Nested Network Method formulation (Williamson, 1992), and the Hotel Bid Price
Method adds stayover extension-contraction modeling to the Nested Network for-
mulation. These two new formulations represent a departure from the usual sepa-
ration of overbooking and allocation (e.g., see Smith et al., 1992). Usually,
overbooking is done prior to the allocation. The usual overbooking objective is to
trade the cost of an empty room against the cost of a “walked” customer. A walked
customer is one with a reservation who is denied a room for lack of availability,
and therefore must find other accomodations with or without the help of the hotel
who held the reservation. Also, this research provides the most realistic test bed to
date for heuristic comparison because stayover extensions-contractions,forecast-
ing en-ors of stayover contractions, and no-show rates are modeled. These condi-
tions add considerable realism to the simulation and, therefore, make our
recommendations for heuristic selection the most practical to date. In addition, this
research is the only one that brings a bid price heuristic into the analysis-this is by
far the most popular heuristic in use today (Eister, January 1998).
Marriott, for example, has been a leader in revenue management practice
(Cross, 1997, p. 64).They defined a “customer category” as a combination of price
and nonprice attributes that a hotel customer faces when making a hotel decision.
Two key elements of Marriott’s yield management approach have been what they
call (1) the strategic yield management approach and (2) the tactical yield manage-
ment approach. The strategic approach (Wind, Green, Shifflet, & Scarbrough,
1989) uses conjoint analysis to determine which assortment of customer categories
would best position Mamott relative to their competition. This approach is used
when either a new brand of hotel is being designed or significant modifications to
a brand’s customer category set are contemplated. The tactical approach develops
computer systems to essentially determine which customer categories to keep open
and which to close for sale depending on the intended date of first stayover and
length of stay (Cross, p. 140). The objective is to maximize revenue given the fixed
assortment of customer categories. This paper addresses the tactical problem.
Eister (January 1998) has verified that the probabilistic demand version of
the Bidprice Method without overbooking is currently the most commonly used
yield management hotel heuristic. Also, this probabilistic Bidprice Method was
compared against this study’s deterministic Bidprice Method via simulation in an
airline environment (Williamson, 1992), and the deterministic Bidprice Method
outperformed the probabilistic Bidprice Method.
THE HEURISTICS
Five heuristics will be tested in this research: (1) Threshold Curve Method A
(Relihan, 1989), (2) Threshold Curve Method B (Relihan), (3) the Nested by
Deterministic Model Shadow Prices (NDSP) Method (Weatherford, 1995), (4) the
Hotel Nested Network Method, and (5) the Hotel Bidprice Method. These latter
two heuristics are new and defined in this article. Threshold Curve methods are
very common in industry practice (Relihan), and the NDSP method is the best per-
former of existing reservation control algorithms that have been tested by others in
a comprehensive manner (Williamson, 1992). The five heuristics are now defined
in turn.
Threshold Curve Method A

This is practically a “first come, first served” approach. For each customer cate-
gory (c), intended length of stay (L), and night of first stayover ( d ) combination
(c,L,d),the expected number of reservations made up to any point before d can be
computed by summing the Poisson demand rates for those days prior to the current
time. The standard deviation for this expected number of reservations is then the
square root of this sum. The reservation is accepted as long as (1) the actual num-
ber of reservations up to this point is less than two standard deviations above the
expected number of reservations and (2) the physical capacity on any of the nights
requested will not be exceeded if the reservation is accepted.
Threshold Curve Method B

This method (Relihan, 1989) is the simplest of all of the heuristics considered. No
reservation request for the highest paying customer category will ever be denied
unless all rooms in the facility have been sold out on at least one of the nights that
the customer plans to stay over. A lower paying customer category request will be
accepted only if the following conditions are met: (1) there is space available on all
intended nights of stay and (2) accepting the request still keeps the cumulative
number of reservations accepted on or below the threshold curve for each intended
night of stay. For the two-category case, this threshold curve is the expected
to-date number of reservations for a night; these reservations are aggregated across
all (c, L, d ) s that cover the night. (Please see the following references for a more
detailed discussion of how Threshold Curve Methods A and B work: Relihan,
1989, and Weatherford, 1991).
Nested by Deterministic Model Shadow Prices (NDSP)

This is the approach used by Weatherford (1995). The reservation acceptance-
rejection scheme hinges on (1) each (c, L, d)’s demand constraint shadow price
that is obtained from the linear programming solution, and (2) the linear program-
ming solution itself. The (c, L, d ) s that cover a given stayover night will be grouped
into “buckets” based on equal shadow prices for that night. A bucket is a group of
(c, L, d ) s covering a given stayover night that will have identical nested reservation
limits. The rationale for grouping by shadow prices, as opposed to expected reve-
nues, is that shadow prices better reflect the contribution of the (c, L, d ) request to
the network of stayovers as a whole (Williamson, 1992). The groupings can differ
from one night to the next. Then, for a given night n, the nested protection level for
bucket b, N:, is:
where the summation is across all (c, L, d ) s whose shadow price puts them into
bucket b and whose stay covers night n. The nested reservation limit for bucket b
on that night n, B i , is:
B l = Cn-CN,n,
where the summation is over all buckets i with higher shadow prices than b on
night n. In other words, the maximum number of reservations for night n that can
be accepted into all (c, L, d)s that are in bucket b or in buckets with lower shadow
prices than b is B:. Thus, once these reservation limits are established, a reserva-
tion request combination (c, L, d) will be accepted only if reservation space based
on these limits is available on all of the nights requested.
Hotel Nested Network Method

This heuristic is identical to the NDSP method, except that the linear program
solved permits overbooking:
subject to
c( rcLd X,,,) 5 Cj + Oj for all nights j ,
where the summation is over all cLd that coverj in the planning horizon of length n,
X,,, I DcLd for all (c, L, d) combinations,
where
d e {1,2, ..., n},
where
n = length of the planning horizon (which includes adding on the maxi-
mum stay length),
c = customer category,
L = intended length of stay,
d = date of first stayover,
Cn = rooms available on night n in the planning horizon; each time a
request is accepted, C, is reduced by the rcLdfor that request,
X, = number of rooms to allocate to (c, L, d) (decision variable). The
fractional X obtained via linear programming will be rounded to the
nearest integer.
rcLd = expected fraction of (c, L, d) that will not cancel or no-show given
that there are x to x - 1 nights until d = (1 - probability of cancellation
for (c, L, d) x to x - 1 nights prior to first stayover) * (1 - probability
of cancellation for (c, L, d) x - 1 to x - 2 nights prior to the first stay-

over) * ... * (1 - probability of cancellation for (c, L, d) 1 to 0 nights
prior to first stayover) * (1 - no-show probability for (c, L, d)),
D,, = mean forecasted demand-this will be the sum of the daily Poisson
demand rates from the current time until d,
f,, = expected room revenue (including amenity consumption and meet-
ing room usage),
Oj = the number of rooms overbooked on nightj across all (c, L, d) com-

binations (a decision variable), and
Kj = overbooking cost.
Two simplifications in this method deserve explanation. First, the linear
overbooking cost. It is not possible to identify in this type of capacity-constrained
allocation which customer category-length of stay-date of first stayover customer
combinations would be walked. Therefore, the overbooking cost must be an aver-
age across all possible combinations, weighted equally. It is plausible that even this
aggregate cost function should have a positive second derivative, given that
greater overbooking might imply an exponential increase in cost. This nonlinearity
could be implemented in a hotel’s yield management system since similar nonlin-
ear optimizations have been fast enough in practice (Eister, January 1998). How-
ever, given that hotels are uneasy about overbooking due to the hard-to-quantify
value of a loyal customer (walking costs), an extremely accurate overbooking non-
linear cost funtion is only as good as the “soft” walking costs (data) estimates.
Therefore, the overbooking cost function used here is linear.
The second simplification-using a linear program to obtain the allocations
instead of a more accurate integer program-is justifiable because it reduces com-
putation time and has been adopted in practice. For example, Mamott hotels have
made 3-796 revenue improvements using continuous yield management optimiza-
tions (Maniott, November 1992).
T h e Hotel Bidprice Method

The Hotel Bidprice method accepts-rejects a reservation request based on whether
or not the expected revenue exceeds the opportunity cost of removing the room(s)
from inventory. It is motivated by the bidprice methods introduced in Williamson
(1992). The building block for this heuristic is the Hotel Nested Network formu-
lation. When a reservation request comes in, the expected revenue and expected
opportunity cost must be computed:
Expected revenue = Pr,, [no-show or cancel] * $0 +
Pr,, [customer will stay for one night] * [(c, 1, d) expected revenue] +
Pr,, [customer will stay for two nights] * [(c, 2, d) expected revenue] + ...
Expected opportunity cost = Pr,, [ no-show or cancel] * $0 +
Pr,, [customer will stay for one night] * [opportunity cost of removing
this room for the one night] + Pr,, [ customer will stay for two nights] *
[opportunity cost of removing this room for the two nights] + ...
Note that the opportunity cost for a set of nights is the sum of the shadow prices in
the solution of the linear program on the capacity constraints for the set of nights.
The Hotel Bidprice heuristic has intuitive appeal, in that it does not have
boolung limits that must be adhered to between heuristic runs; therefore, a priori it
should be superior to the booking limit heuristics in a fast-changing environment.
Also, this heuristic integrates both stayover extension-contraction behavior and
overbooking into its framework, making it the most realistic in terms of detail
incorporated of all of the heuristics considered.
HEURISTIC COMPARATIVE TESTING AND RESULTS

The objective of this research is to give hotel managers a sense of how the five can-
didate heuristics perform relative to one another across a comprehensive set of
realistic hotel operating environments. For example, if a simple heuristic such as
a Threshold Curve method performs as well as a more complex heuristic in an
operating environment matching the hotel manager’s, then the simple heuristic
should be adopted. The cost to implement a complex heuristic (computers, data
collection, training, software, etc.) as well as the availability of good reliable data
required by more sophisticated heuristics favor the simple heuristic. The research
design is summarized in Table 1.
For each hotel operating environment and demand intensity level combina-
tion, a thorough comparison of each heuristic involves coming up with simulta-
neous confidence intervals about mi - mifor all (i, j ) unordered pairs of heuristics,
where m iis the long-run mean net revenue obtained through using heuristic i.
These simultaneous confidence intervals in each hotel operating environment
enable an assessment of the relative performance of each heuristic to be made.
These 90% simultaneous confidence intervals are based on 100 independent
14-night planning horizon replications for each heuristic on a given hotel operating
environment and demand intensity combination. The replications from one heuris-
tic to the next are also independent. The batch sizes (i.e., groupings of replications
into a single observation for statistical analysis) for each heuristic for a given oper-
ating environment and demand intensity level combination were determined such
that independence and normality among all batch means were met. The smallest
batch size that met these criteria was selected. We wanted to use the Tukey multi-
ple comparison approach since it is most appropriate for making all possible
unplanned pairwise comparisons (Sheskin, p. 355). For the Tukey multiple
comparison approach to be valid, the additional assumption of equality of error
variances across all of the heuristics to be compared must be met (Sheskin, p. 369).
This means that the errors in predicting the net revenue obtained across the plan-
ning horizon for each heuristic under a common operating environment-demand
intensity level combination should be equal. This variance equality assumption
was tested on some 100 independent replication runs using the Hartley test (She-
skin, p. 369). Variance equality did not hold.
One solution to the variance equality assumption would be to transform the
net revenues. This would lead to final confidence intervals that could be hard to
interpret, however. It is desirable to use the same multiple comparison method for
each operating environment-demand intensity level combination so that results
across these different scenarios are comparable. Therefore, the Scheffe method
was used to produce these confidence intervals. The Scheffe method is robust with
respect to the variance equality assumption (Neter & Wasserman, 1974, p. 514).
Although its confidence limits are generally quite wide relative to the exact limits,
approximate 95% exact simultaneous confidence limits can be obtained from the
conservative Scheffe 90% limits (IMSL Statistical Library, 1991, multiple com-
parisons sublibrary).
The results from the pairwise simultaneous confidence interval analysis are
summarized in Tables 2, 3, and 4. Net revenue is converted from the simulation
output of averages across 14-night intervals to annual averages in a typical-sized
hotel. This involves multiplying the revenues by 10 x 26. The “26” converts the
revenues from 14-night intervals to annual intervals-we assume that there are 26
fourteen-night intervals in a year. The “10’ comes from an average-sized conven-
tion hotel having about 500 rooms (Marriott, November 1992; Hyatt, January-Feb-
mary 1993); the simulation has 50 rooms. Note that the operating environments in
Table 1 match those in Tables 2 to 4. Tables 2 to 4 are the results of the simulation
runs for high-, medium-, and low-demand intensities, respectively.
To determine the “best heuristic(s)” for each of the 36 hotel operating envi-
ronments, a simultaneous pairwise confidence interval approach was used. The
method of determining what heuristic is best is explained by an example. For a
given hotel operating environment, the following confidence intervals hold: (Bid-
price - Nested Network) = ($-100,000; lOO,000), (Bidprice - NDSP) = (40,000;
lOO,000), (Bidprice - Threshold A) = (100,000; 200,000), (Bidprice - Threshold
B) = (100,OOO; 250,000), (Nested Network - NDSP) = (30,000; 120,000), (Nested
Network - Threshold A) = (50,000; 130,000), (Nested Network - Threshold
B) = (80,000; 124,000). From these data, the Bidprice and Nested Network heuris-
tics are in a tie for best since their difference confidence interval covers 0 and their
pairwise intervals with all other heuristics do not cover 0, and are always positive.
So, the minimum percent (%) improvement would use Min (all lower confidence
limits in the pairwise comparisons with the best heuristics} = Min { 40,000;
100,000; 100,000; 30,000;50,000; 80,000) = 30,000. This is the numerator used
to compute the percent net revenue improvements in Tables 2 to 4. The denomina-
tor is the average net revenue for the worst performing heuristic in the pairwise
comparison that yielded the 30,000 (let’s say this value was 500,000). Then, the
minimum percent (%) improvement would be 30,000/500,000 = 6%.
Seven primary conclusions were derived from this research. They are sum-
marized as follows.
Conclusion #1
The Bidprice heuristic produced at least a 3.2% increase in annual revenues over
all of the other heuristics for operating environments #1, #4, #7, and #10 in Table
1 when the revenue gap and demand intensity are high. In three out of these four
high revenue gap-high demand intensity combinations in Table 2, the Bidprice
method performed better than any other. This 3.2% minimum corresponds to
$514,158 in additional annual revenues at a single hotel facility. Therefore, it is
worth the extra initial effort in data and analysis to implement the Bidprice method
in these three operating environments collection.
Baker and Collier 25 1
Table 2: The best heuristic(s) per operating environment for high demand intensity.
Minimum 14-Night
PercentNet Revenue
Operating Environment Best Heuristic(s) Improvement
1. Resort-good data-group Bidprice 3.2
2. Resort-good data-transient Threshold A, Threshold B 1.9
3. Resort-good data-mixed Threshold A, Threshold B 1.1
4. Resort-bad data-group Bidprice 6.7
5. Resort-bad data-transient Threshold A, Threshold B, NDSP 0.4
6. Resort-bad data-mixed Threshold A, Threshold B, 0.5
NDSP, Bidprice
7. Business-good data-group NDSP, Bidprice 3.5
8. Business-good data-transient Threshold B, NDSP, Bidprice 0.0
9. Business-good data-mixed Threshold B, NDSP 1.5
10. Business-bad data-group Bidprice 3.9
11. Business-bad data-transient Nested Network, Bidprice 2.8
12. Business-bad data-mixed NDSP 2.5
In case #4, operating environment #7 with a high demand intensity, the

NDSP and Bidprice methods perform at the same level, as shown in Table 2. Both
outperform the next best heuristic by at least 3.5% in annual revenues. This trans-
lates into a minimum $598,425 increase in annual revenues to convert to either the
NDSP or Bidprice heuristics. Since the NDSP method requires less data collection
and analysis than the Bidprice method, it should be implemented in this case.
The strong relative performance of the Bidprice method is because: (1) the
Bidprice method is the only one to model stayover extensions-contractions and
(2) only the Bidprice and Nested Network methods model no-shows and cancella-
tions. This heuristic sophisticationenables the Bidprice method to generally outper-
form the other heuristics in the high revenue gap-high demand intensity operating
factor level combinations. These factor level combinations require discriminating
reservation acceptance-rejection heuristics. The fundamental drivers for the need
for yield management-high demand intensities and large gaps between customer
category room revenues-are present in this operating environment.
Conclusion #2
For high no-show level, medium-to-high demand intensity factor level combina-
tions (operatingenvironments#8 and #11 in Table l), it was conjectured that either
or both the Nested Network method and the Bidprice method should outperform
all other heuristics. This is because (1) more sophisticated approaches should be
needed with high demand intensities, and (2) only these two methods model no-
shows explicitly. Operating environments #8 and #11 with either medium or high
demand intensity result in four cases. This hypothesis was supported in three out
of the four cases. The high (medium) demand intensity factor level combinations
are summarized in Tables 2 and 3, respectively.
Table 3: The best heuristic(s) per operating environment for medium demand
intensity.
Minimum 1CNight
Percent Net Revenue
1. Resort-good data-group Threshold A, Threshold B, NDSP 0.0
2. Resort-good data-transient Threshold A, Threshold B 0.0
3. Resort-good data-mixed Threshold A, Threshold B 16.9
4. Resort-bad data-group Threshold A, Threshold B, 0.7
NDSP, Bidprice
5. Resort-bad data-transient Threshold A, Threshold B, 0.0
NDSP, Bidprice
6. Resort-bad data-mixed Threshold A, Threshold B 2.9
7. Business-good data-group Bidprice 0.3
8. Business-good data-transient Bidprice 0.3
9. Business-good data-mixed Threshold B 0.5
10. Business-bad data-group Bidprice 1.4
11. Business-bad data-transient Nested Network, Bidprice 3.5
12. Business-bad data-mixed Threshold B, NDSP, Nested 0.0
Network, Bidprice
For the high no-show level and high demand intensity factor level combi-
nations summarized in Table 2, in operating environment #8 the Threshold B
method should be implemented since it performs as well as any other method and
is by far the simplest. In operating environment # I 1, the Nested Network and Bid-
price methods tie; therefore, the Nested Network method is recommended
because it is less data intensive. Here, the minimum annual percent revenue
improvement is 2.8 %.
In operating environment #8, the Bidprice method is recommended for
medium demand intensity levels since it outperforms every other heuristic (see
Table 3). The next best heuristic, the Nested Network, could have a predicted
annual revenue shortfall of as much as $715,714. In operating environment #11 at
a medium demand intensity level, the Nested Network and Bidprice methods per-
form equally well with a minimum $572,501, or 3.5%, revenue improvement over
the next best heuristic, as shown in Table 3. Because the Nested Network method
is simpler and less data intensive than the Bidprice method, it is recommended.
The Bidprice method performs slightly better than the Nested Network
method in these four cases; they are equivalent in two, and the Bidprice outper-
forms all other heuristics in one case. This is due to the extra flexibility in the Bid-
price method-booking limits that must be adhered to from one heuristic update to
the next are not used like in the Nested Network method. Rather, an economic
analysis is performed at each customer request. Both the Bidprice and Nested Net-
work methods perform relatively well because they are the only heuristics to
model no-show behavior. In operating environments #8 and #I 1 with a high level
of no-shows, this feature in a good performing heuristic is critical.
Table 4: The best heuristic(s) per operating environment for low demand intensity.
Minimum 14-Night
Percent Net Revenue
1. Resort-good data-group Threshold B 0.5
2. Resort-good data-transient Threshold B, NDSP, Nested 0.0
Network
3. Resort-good data-mixed Threshold B 0.1
4. Resort-bad data-group Threshold B, NDSP, Nested 2.0
Network, Bidprice
5.Resort-bad data-transient Threshold B, NDSP, Nested 2.8
Network, Bidprice
6. Resort-bad data-mixed Threshold B, NDSP 0.0
7. Business-gooddata-group Threshold B, NDSP, Nested 3.1
Network, Bidprice
8. Business-good data-transient NDSP, Nested Network Bidprice 0.08
9. Business-gooddata-mixed Threshold B, NDSP, Nested 0.0
Network
10. Business-bad data-group Threshold B, NDSP, Nested 3.1
Network, Bidprice
11. Business-baddata-transient NDSP, Nested Network, Bidprice 0.1
12. Business-bad data-mixed Threshold B, NDSP, Nested 2.9
Network, Bidprice
Conclusion #3
In 10 out of the 12 low demand intensity cases considered in Table 4, the Threshold
B method performed at least as well as any other heuristic. In these 10 cases, the
Threshold B method is recommended because it is the simplest, cheapest to imple-
ment, and least data-intensive heuristic considered. For the two cases in which
both threshold methods were outperformed-operating environments #8 and
#1 I-the NDSP, Nested Network, and Bidprice methods all were the top perform-
ers. Because the NDSP is the simplest and least data intensive of these three heu-
ristics, it is the heuristic recommended in these three cases. Although the minimum
annual percent net revenue improvement for operating environment #8 is only
0.08%,the revenue fall-off from the NDSP to the next most promising heuristic-
the Threshold B method-could be as high as $255,521 per year. The same pattern
exists for operating environment #11, where the minimum annual percent revenue
improvement is 0.1%; in this case, the revenue fall-off from the NDSP to the next-
best heuristic could be as high as $225,195 per year. These potentially high reve-
nue fall-offs justify the data acquisition and analysis investment in the NDSP
method.
The overall strong performance of the Threshold B method in these cases
with low demand intensity is due to average capacity utilization being 90%.With
this utilization, it is unlikely on a given night that the room demand will exceed the
hotel’s capacity. Therefore, there is hardly any need for allocation procedures. A
Threshold “first come, first served” procedure should work about as well as any
other in these low demand operating environments. For the two cases in which the
threshold methods are outperformed, the no-show level is high. When no-show
levels are high, sophistication in yield management heuristics is needed. The rec-
ommended NDSP method provides this sophistication.
Conclusion #4
The top performer in resort operating environments with medium-to-high demand
intensities was hypothesized to be the Bidprice heuristic. This was not the case.
There are 12 cases in which we are investigating a resort operating environment as
shown in Table 1 with either high or medium demand intensity. The high (medium)
demand intensity results for resorts are summarized as the first six operating envi-
ronments in Tables 2 and 3, respectively. For high demand intensity as shown in
Table 2, the Threshold B method performs as well as any other heuristic in oper-
ating environments #2, #3, #5, and #6. For medium demand intensity in Table 3,
the Threshold B method performs as well as any other heuristic in operating envi-
ronments #1 through #6. In 10 out of these 12 cases, the Threshold B heuristic is
recommended.
As shown in Table 2, only in operating environments #1 and #4 with high
demand intensities is the Threshold B method inferior to any other heuristic. The
Bidprice method is the best heuristic by at least 3.2% in annual revenues or, equiv-
alently, at least $514,158 per hotel per year.
Stayover extensions-contractions are a key definer of the resort operating
environment. The Bidprice heuristic models this phenomenon in its opportunity
cost-revenue comparison, but this phenomenon is not a part of the linear program
that underlies the opportunity cost calculation. This is why the Bidprice heuristic
does not dominate here. Future research should incorporate stayover extensions-
contractions in the optimization model.
Conclusion #5
Threshold Method B method was hypothesized to never be outperformed by the
Threshold Method A in any of the 36 scenarios summarized in Tables 2 to 4. This
is because (1) the Threshold B method’s demand forecasting is more aggregate
than Threshold A’s; therefore, the forecasting task in Threshold B’s heuristic is
easier to accomplish; and (2) Threshold B never rejects a higher paying customer
if space is available, whereas Threshold A does. This conjecture proved to be
valid. If one examines the (Threshold A - Threshold B) confidence intervals, in no
case does the Threshold A method outperform the Threshold B method. In 18 out
of the 36 cases the Threshold B method is statistically superior to the Threshold A
method. In terms of ease of understanding and data requirements, the two heuris-
tics are about the same. Therefore, the Threshold B heuristic is always recom-
mended over the Threshold A heuristic. The Threshold A heuristic should never be
used.
Conclusion #6
The following three factors in Table 1 were insignificant in differentiating relative
heuristic performances: (1) the error in estimating the no-show rates, (2) the error
in estimating the actual stayover cumulative distribution function (cdf), and (3) the
demand peak gap. The good data-bad data distinction in operating environments
also does not appear to produce distinctions in relative heuristic performances.
This is because the good data-bad data distinction is solely tied to two factors that
proved to be unimportant in the final simulation runs-the no-show and actual
stayover cdf errors. Therefore, these factors should be dropped from further hotel
overbooking-allocation heuristic analysis. This would enable analysts to focus
more intensively on the other factors that are significant as heuristic performance
differentiators:the no-show level, the actual stayover cdf, the revenue gap, and the
demand intensity level. These four factors all had a significant influence on the
heuristic performance and revenue results.
Conclusion #7
In the business operating environments as shown in Tables 2 to 4,the most appro-
priate heuristic to use is dependent primarily on the revenue gap, no-show level
factors, and demand intensity levels. When the demand intensity is at its low level
as shown in Table 4, the Threshold B method performs as well as any other heu-
ristic. This is understandable because with low demand intensities there is less
need for sophisticated reservation control procedures. When both the revenue gaps
and demand intensities are at their high levels as shown in Table 2, either the Bid-
price or the NDSP method is the best to use. In these circumstances, the need for
sophisticated revenue control procedures is greatest. When the no-show level is at
its high level (i.e., operating environments #8 and #11) and the demand intensity
is either high or medium, in three out of the four operating environments the
Threshold B method is not sophisticated enough to achieve best results. Again, in
these circumstances more sophistication in the recommended reservation control
heuristic is needed as shown in Tables 2 and 3.
The effects on relative heuristic performance in switching between group,
transient, and mixed operating environments is predominantly tied to the levels of
the demand intensity, revenue gap, and no-show level factors. When the demand
intensity is low, whether the operating environment is group, transient, or mixed is
irrelevant-the Threshold B method is the one to use in most all cases in Table 4.
Even at the medium demand intensity level in Table 3, in only 4 of the 12 operating
environments is a nonthreshold method the preferred one for implementation. In
these four operating environments, the no-show level is high in two of them and
the revenue gap is high in the two having only a medium no-show level. The two
high no-show cases correspond to transient demand. In both of these cases, the
Nested Network or Bidprice method is preferred; when customer types are pre-
dominantly transient, the no-show levels are typically higher than when there is
more group demand in the overall demand mix. At the high demand intensity lev-
els in Table 2, the nonthreshold methods are preferred predominantly for group
operating environments. In each of the four group operating environments in this
table, use of a nonthreshold method is justified. However, in only one out of the
four transient operating environments and in only one out of the four mixed oper-
ating environments was a nonthreshold method justified. This difference between
the group and nongroup operating environments is due to the high revenue gaps
only occurring in group operating environments; the higher revenue gaps imply a
need for the more sophisticated nonthreshold methods.
CONCLUSIONS AND MANAGERIAL IMPLICATIONS

Several patterns emerged from this research as follows:
1. The Hotel Bidprice heuristic is the recommended method in hotel oper-
ating environments with high revenue gaps and high demand intensities.
2. The Threshold B heuristic is the recommended method in low demand
intensity operating environments.
3. The Hotel Bidprice and Nested Network heuristics are the recommended
methods in high no-show level and medium to high demand intensity
hotel operating environments.
4. The Threshold A heuristic should never be used.
5. The Hotel Bidprice Method typically outperforms the other nonthresh-
old heuristics. A priori, it is not clear that this should be so, and no one
else in the literature has compared a bidprice method with NDSP meth-
ods in hotel environments.
6. In many operating environments, the simpler threshold methods per-
formed as well as more complex heuristics as shown in Tables 2 to 4.
This is a very important finding for practicing hotel managers in that the
time and expense of developing and maintaining more complex heuris-
tics is not always justified. This is most likely due to the realistic simu-
lation test beds used here. For instance, the stayover extensions-
contractions modeled here add considerable “noise” to the system, thus
drowning out the benefits of more mathematically elegant heuristic
logic. Also, this is the only research to model parameter estimation accu-
racy in the simulation test bed that adds considerable noise to the hotel’s
operating environment.
Heuristic selection is very much dependent on the hotel operating environ-
ment. The 36 realistic scenarios defined in Table 1 and recommended heuristics
shown in Tables 2 to 4 contribute to our knowledge of when and where to use what
heuristic. The solution space defined by the 36 scenarios and the simulation test
bed are the most comprehensive to date. These conclusions are viewed as prelim-
inary guidelines for selecting hotel booking heuristics. If the hotel’s operating
environment and associated parameters don’t exactly match the ones used in
Tables 1 to 10, new simulations may be necessary to optimize heuristic selection.
Also, different heuristics may be required for different time frames due to changes
in parameters and types of customers. Data availability, data accuracy, forecast
ability, computer capability, and user understanding of the heuristic are also impor-
tant criteria in heuristic selection.
Several modifications and improvements are planned in these yield manage-
ment heuristic methods. First, the development of a single “sufficing heuristic”
that is robust and provides good solutions under all operating conditions would be
preferable to practicing hotel managers. Second, a comparison of alternative
demand forecasting methods should be made in this simulation environment.
For example, the industry standard (Geraghty, 1995) Winter’s Three Parameter
Exponential Smoothing method could be compared with more sophisticatedmeth-

ods, such as Box-Jenkins approaches.
Third, similar heuristics based on the probabilistic demand optimization for-
mulation could be tested against the deterministicmethods in this paper. Although
this formulation did not look promising in an airline simulation study (Williamson,
1992),it is plausible that heuristics based on this formulation would perform better
in a hotel environment. Fourth, our heuristics, based on an integer optimization
formulation, could be tested-the shadow prices that our heuristics depend on
would be more precise with an integer formulation. Finally, as computing power
increases, even more realistic simulations could be developed for testing hotel
yield management heuristics.
In the dynamic real world with imperfect data, much more research needs to
be done on the benefits, if any, of probabilistic versus deterministic models and
nonlinear versus linear functions. Additional model complexity does not necessar-
ily mean better real-world yield management solutions. [Received: October 1,
1996. Accepted: April 9, 1998.1
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APPENDIX
Table Al: Definition of factors in the yield management system simulator.
Factor Definition
No-show level The probability that a customer, defined by their customer category-
intended length of stay-night of week of first stayover (1) will not be
present on any of their intended stay nights, (2) will not notify the
hotel in advance that they are canceling.
Overbooking The cost of refusing to admit a customer with a reservation. This
costs includes the expected discounted future lost sales plus the cost of finding
the person a room at another facility; this is per customer category.
No-show error The fraction a applied in the following manner to determine the real
(not forecasted) no-show probability for a given customer category-
intended length of stay-night of week of fiist stayover combination on
a given simulation run: real no-show probability = Uniform [( 1 - a)
* forecasted no-show probability, (1 + a) * forecasted no-show proba-
bility].
Stayover For each customer category-intended length of stay-night of week of

cdf type first stayover combination, the following triple is created: (p,, p 2 , p 3 ) ,
where p i is the probability that the customer actually stays only i nights
or less-the customer stays at least one night. The customer notifies
the hotel of a stayover extension from their intended length of stay at
midnight of their last intended length of stay night; there is no advance
notice of stayover contractions.
Stayover The fraction a , where the actual-as opposed to projected-length of

cdf error stay for a customer is computed as: actual length of stay = round
(Uniform [( 1 - a ) * projected length of stay, (1 + a ) * projected length
of stay]); actual length of stay = max (1, actual length of stay}; actual
length of stay = min {3, actual length of stay}. Note that the projected
length of stay is computed by taking a draw against the stayover cdf.
Revenue The difference between the average nightly room revenues for the two
gap customer categories used in the simulation.
Peak gap The difference in days between the peak demand rate for customer
category one (the lower paying category) and the peak demand rate for
customer category two.
Demand The ratio of mean total demand for a given night over the capacity. The
intensity mean demand for each night is the same.
Table A2: The fixed parameters in the simulation model.

Parameter Definition
Number of customer A customer category is a type of customer defined by (1) their
categories expected room revenue, including amenity consumption plus
expected meeting room usage and (2) their demand process as
described in Table A4.
Maximum stay length The maximum number of nights that the customer can stay.
Maximum advance The maximum number of nights before the first stayover in
reservation advance that a customer can book.
Replication length The planning horizon.
Number of rmms
Cancellation The probability that a customer category-intended length of
probabilities stay-day of week of first stayover combination will cancel a
reservation n nights in advance of the f i s t stayover.
Heuristic update How often the linear programming allocation is performed

increment for a given heuristic.
Table A3: Stayover extension and contraction cdfs.

Intended Length of Stay
Factor Level 1 night 2 nights 3 nights
Resort (.75,.9, 1)* (0, .75,1) (O,O, 1)
Business (375,1, 1) (.125, 375, 1) (0, .125, 1)
*For this cdf. .75 is the probability that a resort customer intending to stay one night will
actually stay for one night; .9 is the probability that this same customer will actually stay
for two nights or one night-therefore, .9 - .75 = .15 is the probability that this customer
will actually stay for two nights; 1 is the probability that this same customer will actually
stay for three, two, or one night(s)-therefore, 1.0- .9 = .l is the probability that this cus-
tomer will actually stay for three nights. Note that a stayover-extension is first known to
the hotel at midnight of the last intended stayover night, and the contraction is made
known at midnight of the last actual stayover night. Also, the stayover cdf error fraction
is 0 for low, .4for medium, and .8for high factor levels.
zB
Table A4: Demand intensity and peak gap combinations and their associated demand processes.* -i
-
Low Demand Medium Demand High Demand 4
Intensity = 0.9 Intensity = 1.2 Intensity = 1.5 22
(P
Low Medium High Low Medium High Low Medium High
Daysuntil CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC
FirstStay #1 #2 #I #2 #1 #2 #1 #2 #1 #2 #1 #2 #1 #2 #I #2 #I #2
14-13 0.2 0.3 0.3 0.3 0.6 0.4 0.1 0.3 0.6 0.3 0.8 0.3 0.3 0.3 0.8 0.3 1.0 0.3
13-12 0.2 0.0 0.4 0.0 0.5 0.0 0.2 0.0 0.7 0.0 0.7 0.0 0.6 0.0 0.8 0.0 0.9 0.0
12-11 0.3 0.0 0.5 0.0 0.5 0.0 0.4 0.0 0.7 0.0 0.7 0.0 0.7 0.0 0.9 0.0 0.9 0.0
11-10 0.3 0.0 0.6 0.0 0.5 0.0 0.6 0.0 0.8 0.0 0.7 0.0 0.8 0.0 1.0 0.0 0.8 0.0
10-9 0.5 0.2 0.5 0.2 0.4 0.2 0.7 0.4 0.7 0.1 0.6 0.1 0.8 0.1 0.9 0.1 0.8 0.1
9-8 0.5 0.4 0.4 0.2 0.5 0.3 0.2 0.7 0.5 0.2 0.5 0.2 0.9 0.4 0.7 0.3 0.7 0.3
8-7 0.6 0.5 0.3 0.4 0.80.2 0.6 0.2 0.4 0.4 0.4 0.4 1.0 0.5 0.6 0.4 0.6 0.4
7-6 0.5 0.6 0.2 0.2 0.2 0.7 0.8
0.2 0.3 0.4 0.3 0.4 0.9 1.0 0.3 0.5 0.3 0.5
6-5 0.4 0.5 0.2 0.2 0.2 0.4
0.5 0.6 0.2 0.5 0.2 0.5 0.2 0.8 0.2 0.6 0.2 0.6
5-4 0.2 0.3 0.2 0.3 0.3 0.6
0.2 0.5 0.1 0.6 0.1 0.5 0.1 0.8 0.1 0.6 0.1 0.6
4-3 0.0 0.2 0.0 0.4 0.0 0.6
0.0 0.5 0.0 0.8 0.0 0.6 0.0 0.7 0.0 1.0 0.0 0.7
3-2 0.0 0.2 0.0 0.5 0.0 0.4
0.0 0.5 0.0 0.6 0.0 0.6 0.0 0.6 0.0 0.8 0.0 0.8
2- 1 0.0 0.2 0.0 0.5 0.0 0.3
0.0 0.2 0.0 0.6 0.0 0.6 0.0 0.6 0.0 0.8 0.0 0.8
1-0 0.0 0.2 0.0 0.6 0.0 0.2
0.0 0.1 0.0 0.5 0.0 0.8 0.0 0.3 0.0 0.7 0.0 1.0
Totals 3.7 3.7 3.7 3.7 3.7 3.7
5.0 5.0 5.0 5.0 5.0 5.0 6.3 6.3 6.3 6.3 6.3 6.3
*The cell entries are the Poisson demand rates; “CC # ’ is the abbreviation for customer category #1 or #2.
Table A5: Definition of low-medium-high revenue gaps.*

Medium Medium
LowGap LowGap Gap Gap HighGap HighGap
Stayover CC#l CC#2 CC#1 CC#2 CC#1 CC#2
Night ($1 ($1 ($1 ($1 ($1 ($1
a. Nightly Revenues
Sun-Mon 1 I5 135 100 150 90 160
Mon-Tues 1 I5 135 100 150 90 160
Tues-Wed 115 135 100 150 90 160
Wed-Thurs 115 135 100 150 90 160
Thurs-Fri 115 135 100 150 90 160
Fri-Sat 92 108 80 80 72 128
Sat-Sun 92 108 80 80 72 128
b. Nightly Overbooking Costs

Sun-Mon 230 270 200 300 180 320
Mon-Tues 230 270 200 300 180 320
Tues-Wed 230 270 200 300 180 320
Wed-Thurs 230 270 200 300 180 320
Thurs-Fri 230 270 200 300 180 320
Fri-Sat I 84 216 160 240 144 256
Sat-Sun 184 216 160 240 144 256
c. Aggregated Overbooking Costs for Math Programs

Stayover Night Cost ($1
Sun-Mon 500.00
Mon-Tues 500.00
Tues-Wed 500.00
Wed-Thurs 483.33
Thurs-Fri 450.00
Fri-Sat 4 16.67
Sat.-Sun. 450.00
*The “revenue gap” is the difference between the mean nightly revenues for the two cus-
tomer categories.
Table A6: Definition of no-show probability factor levels.

Customer Category
Factor Level Customer Categorv #1 Customer Cateeorv #2
Low .025 .05
Medium .0875 .075
High .15 .I0
Note: The no-show error fraction is 0 for low, .4 for medium, and .8 for high factor levels.
Tim Baker is currently the head of pricing and yield management research at Bass
Hotels and Resorts, Inc., in Atlanta, GA. He previously worked at an international
aviation consulting firm developing yield management decision support systems.
Dr. Baker has 11 years of work experience, primarily doing operations research
work in the hotel, airline, petroleum, and defense industries. Dr. Baker received a
PhD in operations management from Ohio State University in 1994, an MS in
operations research from the University of North Carolina at Chapel Hill, and a BA
in economics from Claremont McKenna College.
David A. Collier is a member of the faculty of Management Science, Fisher Col-

lege of Business, The Ohio State University. Dr. Baker will be joining the Manage-
ment and Decision Sciences Department at Washington State University in the fall.
He is the author of three books on service management and quality management,
Service Management: The Automation of Services, Service Management: Operat-
ing Decisions, and The Service/Quality Solution: Using Service Management to
Gain Competitive Advantage. He is the recipient of three awards for outstanding
journal articles, has written and published six invited book chapters; seven of his
cases have been reprinted in major marketing and operations management text-
books, and he has over 60 refereed publications. Professor Collier was nominated
and selected to the 1991 and 1992 Board of Examiners for Malcolm Baldrige
National Quality Award. In 1995, Dr. Collier taught executive programs in
England, France, and Argentina, and currently teaches in-house executive pro-
grams for Banc One and Emery Worldwide.

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15405915, 1999, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-5915.1999.tb01608.x by <Shibboleth>-member@ljmu.ac.uk, Wiley Online Library on [10/01/2023].

A Comparative Revenue Analysis

PROBLEM D E S C R O N AND LITERATURE REVIEW

XcLd I DcLd for all (c, L, d) combinations,

Threshold Curve Method A

Threshold Curve Method B

Nested by Deterministic Model Shadow Prices (NDSP)

Hotel Nested Network Method

c( rcLd X,,,) 5 Cj + Oj for all nights j ,

X,,, I DcLd for all (c, L, d) combinations,

d e {1,2, ..., n},

of cancellation for (c, L, d) x - 1 to x - 2 nights prior to the first stay-

Oj = the number of rooms overbooked on nightj across all (c, L, d) com-

T h e Hotel Bidprice Method

HEURISTIC COMPARATIVE TESTING AND RESULTS

In case #4, operating environment #7 with a high demand intensity, the

CONCLUSIONS AND MANAGERIAL IMPLICATIONS

Exponential Smoothing method could be compared with more sophisticatedmeth-

Mace, A. (October, 1997). Aeronomic’s maxim system. A presentation on PC-

Stayover For each customer category-intended length of stay-night of week of

Stayover The fraction a , where the actual-as opposed to projected-length of

Table A2: The fixed parameters in the simulation model.

Replication length The planning horizon.

Heuristic update How often the linear programming allocation is performed

Table A3: Stayover extension and contraction cdfs.

Table A5: Definition of low-medium-high revenue gaps.*

b. Nightly Overbooking Costs

c. Aggregated Overbooking Costs for Math Programs

Table A6: Definition of no-show probability factor levels.

David A. Collier is a member of the faculty of Management Science, Fisher Col-

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