78 Int. J. Revenue Management, Vol. 2, No.

1, 2008
Copyright 2008 Inderscience Enterprises Ltd.


Booking models for hotel revenue management
considering multiple-day stays
S. Liu
School of Management,
Central University For Nationalities,
Beijing 100081, China
E-mail: sqliuqd@yahoo.com.cn
K.K. Lai*
Department of Management Sciences,
City University of Hong Kong,
Kowloon, Hong Kong
and
College of Business Administration,
Hunan University, Hunan 410082, China
E-mail: mskklai@cityu.edu.hk
*Corresponding author
S.Y. Wang
Academy of Mathematics and Systems Sciences,
Chinese Academy of Sciences,
Beijing 100080, China
E-mail: sywang@amss.ac.cn
Abstract: This study presents several revenue optimisation models for hotel
room reservations for a future target day with multiple-day stays. Assume that
the hotel has only one type of room but the unit rate for the room may be
different during every booking period and every reservation may cover several
days. A stochastic programming model with semi-absolute deviations for
measuring the risk for hotel revenue under an uncertain environment is
proposed. And this stochastic model can be changed into a linear programming
model by applying linearisation techniques. Numerical examples are presented
to illustrate the efficiency of these models.
Keywords: revenue management; semi-absolute deviation; stochastic
programming.
References to this paper should be made as follows: Liu, S., Lai, K.K. and
Wang, S.Y. (2008) Booking models for hotel revenue management
considering multiple-day stays, Int. J. Revenue Management, Vol. 2, No. 1,
pp.7891.
Biographical notes: S.Q. Liu is a lecturer at the School of Management,
Central University For Nationalities of China, Beijing. She received her PhD
from Beihang University of China. Her current research interests include


Booking models for hotel revenue management 79



logistics management and revenue management.
S.Y. Wang is a Professor at the Institute of Systems Science, Chinese Academy
of Sciences (CAS). He received a PhD in Operations Research from the
Institute of Systems Science, CAS, Beijing in 1986. His current research
interests include e-auctions, logistics management and revenue management.
K.K. Lai is the Chair Professor of the Management Science at City University
of Hong Kong, and the Dean of College of Business Administration, Hunan
University, China. He received his PhD from Michigan State University. His
current research focuses on services management, logistics management and
revenue management.
1 Introduction
The concept of revenue management originated with deregulation of the US airline
industry in the late 1970s. It is an application of information systems and pricing
strategies to allocate the right capacity to the right customers at the right price at the right
time (Kimes, 1989; Weatherford and Bodily, 1992).
The revenue management was first applied in the airline industry, where it produced
some success for the industry. Although the hotel industry has similar characteristics,
according to Kimes (1989), there are two significant differences between airlines and
hotels:
1 Airline passengers go from an origin to a destination via journey legs, whereas hotel
customers go from a first night stay to a last night stay in consecutive night stays, i.e.
the demand structure is different
2 Hotel customers can easily extend or contract their planned length of stay at a
moments notice, whereas it is almost impossible for airline passengers to alter their
itinerary from an origin to a destination, once they are on board a flight.
Therefore, models for the hotel revenue management should be different from those of
airlines.
In this research, we propose several models for optimal booking of hotel rooms for a
future target day. Assume that the hotel has only one type of rooms, the rate for the room
may be different for different booking periods, and every reservation may cover several
days, though the length of stay during each period may be different. First, a basic
deterministic linear programming model for solving rooms booking is formulated. In this
model, the demand is assumed to be known. Then, a stochastic programming model with
risk measure is proposed because of uncertainty of demand, and a stochastic
programming model with semi-absolute deviations, considering cancellations and
no-shows, is also provided.
This paper is organised as follows. In the following section, we give a survey of
research on the hotel revenue management. Some related notations, assumptions and the
basic deterministic linear programming models are given in Section 3. Stochastic
programming models with semi-absolute deviations are provided in Section 4, and some
illustrative examples for these models are given in Section 5. The conclusion is presented
in Section 6.


80 S. Liu, K.K. Lai and S.Y. Wang



2 Literature review
The revenue management strategy has been used for many years in the hotel industry
(Liberman and Yechiali, 1978). Many hotels offer special rate packages for
low-occupancy periods: week-end rates, mid-summer breaks, New Year breaks, etc.
Most of the hotel revenue management literature covers tactical problems of dynamic
pricing, capacity planning, over-booking, no-shows and cancellations, using
mathematical optimisation techniques. Relihan (1989) provides a yield-management
method for hotel-room pricing the threshold curve method, which is the most popular
hotel revenue management technique. An approach using discounting in hotels is
proposed by Hanks, Cross and Noland (1992). They inform that Marriott was the first
large chain to implement a rate-fence system for its transient guests. The rate-fence
system is parallel to a pricing scheme that has been employed by airlines for years.
Customers are segregated into categories:
1 specific points of time at which reservations can be made
2 refund restrictions
3 room rates
4 permissible stay-over dates
5 restrictions on changes in stay-over dates.
Along with the segmentation analysis, use a stochastic dynamic model to examine an
optimal strategy for booking hotel rooms for different market segments considering
multiple-day stays. Comparative analysis of the hotel revenue management heuristics is
proposed by Baker and Collier (1999); performances of five booking control policies
under 36 different hotel operating environments are compared in their paper. Ladany
(1976) and Badinelli (2000) propose a dynamic programming formulation for managing
reservations in the hotel industry. Goldman et al. (2002) study booking control policies
using a rolling horizon of decision periods. An overview of the revenue management is
presented by Boyd and Bilegan (2003). In their research, they present a successful e-
commerce model for dynamic automated sales and illustrate some related techniques and
methods for forecasting and optimising the sale of inventory. Lai and Ng (2005) propose
a stochastic approach and use an absolute deviation model to measure risk and revenue
from random demands in several scenarios.
Pricing has become more and more important, as well as intricate, for hotels,
especially the dynamic pricing. In the last decade, optimal dynamic pricing has remained
a challenging problem. A survey of the revenue management by dynamic pricing is given
in Bitran and Caldentey (2003). They give an elaborate overview of the revenue
management and examine the research on, and results of, dynamic pricing policies and
their effect on revenue in their paper. Talluri and van Ryzin (2004) also provide
comprehensive overviews of the areas of the dynamic pricing and revenue management.
Feng and Xiao (2000) study pricing problems with a predetermined set of price points.
A comprehensive model to integrate the pricing and capacity allocation for perishable
products is also given by Feng and Xiao (2006). A cross-cultural comparison of
customers fairness perceptions in variable hotel pricing is proposed by Choi and Mattila
(2006).


Booking models for hotel revenue management 81



Recently, the revenue management strategies in other industries have been studied.
Kimms and Muller-Bungart (2007) propose a planning problem at a broadcasting
company. Mangani (2007) derives an optimal ratio between advertising and sales income
when a publisher maximises its profits on advertising space and product price. A mobile
TV service bundle problem-based pricing strategy is provided by Rautio, Anttila and
Tuominen (2007). A number of human-related factors in the design of an efficient
revenue management system in a local subsidiary of Multinational Corporation are
highlighted by Zarraga-Oberty and Bonache (2007). And a comprehensive review of the
recent development of the revenue management in different industries and some
important areas that warrant further research are provided by Chiang, Chen and Xu
(2007). More different revenue management strategies including pricing, auctions,
capacity control, overbooking and forecasting are discussed in their research.
However, most of the above-mentioned models do not consider the risk of fluctuating
revenues, except in Lai and Ng (2005). As we know, demand for hotel rooms is uncertain
and, therefore, a decision maker may face several demand scenarios in the decision-
making process. He (or she) needs to consider the risk involved under different scenarios.
In this paper, an optimal strategy for renting hotel rooms is provided for situations
when a decision maker faces random customer arrivals. Because of uncertain demand, the
decision maker may face different demand scenarios; a stochastic programming model
with semi-absolute deviations to measure a hotels revenue risk is formulated, and a
stochastic programming model that considers cancellations and no-shows is also
provided.
3 Deterministic linear programming models
One characteristic of the hotel revenue management is that the products under review are
perishable. If hotel rooms are not rented on the target day, revenue earned will be zero.
So the rooms should be reserved in advance and, especially when supply exceeds
demand, the decision maker should determine the right number of rooms to be booked in
advance, so as to maximise revenue. During every reservation period, when a potential
customer requests a room, the manager has to decide whether or not to rent it in advance
to that potential customer. When making this decision, the manager does not know how
many additional potential customers, who may be higher paying, will arrive on that
particular day. So the decision that the hotel room manager faces is whether to accept a
reservation request.
This research presents several revenue optimisation models for hotel room
reservations for a future target day with multiple-day stays. The booking horizon is
divided into several periods. Assume that the hotel has only one type of rooms but the
unit rate for the room may be different during every booking period and every reservation
may cover several days.
Major notations for parameters and variables used in this paper are as follows:
- C is the room capacity of the hotel.
- T is the index for the number of periods in advance of the booking dates, t = 1, ,
T. Period t = T is the start of the booking horizon and period t = 1 is the end of the
reservation period. In this paper, the time span of each period may not be equal, but
period t = 1 covers only one day that represents the walk-in day.


82 S. Liu, K.K. Lai and S.Y. Wang



- i is the index for the number of days that the customer will stay in the hotel, i = 1, ,
I. In other words, the customer will stay in the hotel room, which he (or she) has
reserved, for i days.
- x
ti
is the number of rooms that the hotel books out during period t for i days.
- D
ti
is the booking demand, which is reserved during period t for i days.
- r
ti
is the revenue gained per booking made in period t for i days.
C, x
ti
and D
ti
are integers, and x
ti
is the decision variable in this paper.
So we can obtain that
1
T
ti
t
x
=
_
is the number of customers, staying for i days.
In our models, period t = 1 is the walk-in, i.e.
1
1
I
i
i
x
=
_
is the number of walk-in
customers who stay in the hotel without having made a reservation for the target day.
Without loss of generality, we assume that there are no customers staying in the hotel
on the target day. If there are customers staying, and the number of rooms occupied is c,
then we can let C C c be the room capacity of the hotel. We also assume that any
customer who has reserved will stay for at least one night. The actual number of
reservations on the target day is
1 1
T I
ti
t i
x
= =
_ _
. This cannot exceed the total capacity,
namely,
1 1
T I
ti
t i
x C
= =
s
_ _
.
From the above presentation, the total revenue can be described as
1 1
.
T I
ti ti
t i
r x
= =
__
The basic mathematical model for hotel room booking strategy is
1 1
1 1
max
s.t.
, 1, , ; 1, ,
0, 1, , ; 1, , ,
T I
ti ti
t i
T I
ti
t i
ti ti
ti
r x
x C
x D t T i I
x t T i I
= =
= =
s
s = =
> = =
__
__
! !
! !
(1)
where
ti
x is the decision variable in this model.
In this model, some constraints can be added to provide for restricted reservations for
some periods, or some customers staying over. For example, if the decision maker wants
to restrict the number of reservations for stays of three days and wants the quantity of
booking to be no more than L (a constant the decision maker gives); a constraint
3
1
T
t
t
x L
=
s
_
may be added.
Similarly, if the total demand is less than the hotels room capacity, i.e.
1 1
,
T I
ti
t i
D C
= =
<
_ _
in order to obtain revenue maximisation, the decision maker can
extend the reservations to
1
T k + periods and change the first constraint to


Booking models for hotel revenue management 83



1
1 1
,
T k I
ti
t i
x C
+
= =
s
__
where
1
k is a given constant. In this situation, the decision maker may offer customers
who booked during
1
k periods a discounted price, in order to encourage them to reserve
in advance. Consequently,
1
( 1, , ; 1, , )
ti
r t T T k i I = + . + = . , the revenue gained per
booking may be lower, compared to the late reservations scenario. In the situation, the
objective function of Equation (1) should be changed to
1
1 1
T k I
ti ti
t i
r x
+
= =
_ _
.
If the total demand exceeds the hotels room capacity, the decision maker can limit
the number of late reservations by adding a constraint
2
2
1 1
,
k I
ti
t i
x L
= =
>
__
where k
2
(k
2
< T) is a constant and L
2
is the protection level fixed by the decision maker.
And assume that the unit room rate may be set higher in order to obtain more revenue
during each period
2
1, , t k = ! , which accords with the reality that the customers paying
off higher book late in general.
1 Does not consider cancellations and no-shows. If we take into account the two
aspects and assume that the probabilities of cancellations and no-shows are
c
P and
n
P respectively, then we can change the first constraint to
1 1
(1 ) .
T I
c n ti
t i
P P x C
= =
s
__
So, Equation (1) can be changed to
1 1
1 1
max
s.t. (1 )
, 1, , ; 1, ,
0, 1, , ; 1, , .
T I
ti ti
t i
T I
c n ti
t i
ti ti
ti
r x
P P x C
x D t T i I
x t T i I
= =
= =
s
s = =
> = =
__
__
! !
! !
(2)
A numerical example will be illustrated in Section 4.
4 Stochastic programming models with semi-absolute deviations
In the above models, demands D
ti
(t = 1, , T; i = 1, , I) are assumed to be certain. In
reality, parameters D
ti
are usually uncertain, at the start of the reservation period.
Moreover, the revenues may not be fixed as the decision maker would like to set different
pricing with respect to different types of demand. In order to solve this problem, the
expected value E(D
ti
) can be used to replace the uncertain parameter of D
ti
. Although the


84 S. Liu, K.K. Lai and S.Y. Wang



decision maker can sometimes obtain reasonable solutions by using the expected value
approach, a drawback of this approach is that its solutions are not always guaranteed to
be feasible. Under an uncertain environment, we assume that the decision maker accepts
uncertainty first, then understands the uncertainty and then inserts it into the planning
decision model. Scenario-based stochastic programming tools are based on this concept.
As with Lai and Ng (2005), we use robust optimisation to solve this problem.
Assume that a decision maker faces a set of scenarios
{ } 1, , s S eO = ! with unknown
parameters and for each scenario, the corresponding probability is
s
p , such that 0
s
p >
and
1
1
S
s
s
p
=
=
_
. Then:
-
s
ti
D is the demand during period t for i days in scenario s.
-
s
ti
r is the revenue gained per booking made in period t for i days in scenario s.
A stochastic programming model can be obtained; and in this model, we use a
semi-absolute deviation to measure the risk of revenue falling below the expected
revenue. Denote this as
{ }
{ }
1 1 1 1 1 1 1 1 1
1 1 1
1 1
max min 0,
min 0,
s.t.
max , 1, , ; 1, , ; 1, ,
0, 1, , ; 1,
S T I S T I S T I
s s s
s ti ti s ti ti s ti ti
s t i s t i s t i
S T I
s
s ti ti ti
s t i
T I
ti
t i
s
ti ti
s
ti
p r x p r x p r x
p w D x
x C
x D t T i I s S
x t T i

= = = = = = = = =
= = =
= =



`

)

s
s = = =
> = =
_ __ _ __ _ __
_ __
__
! ! !
! , I !
(3)
where and w
ti
are non-negative weighting factors.
The first term in the objective function of Equation (3) is the expected revenue of the
hotel, and the second term is the semi-absolute deviation of the revenue. We use the
semi-absolute deviation model to measure the hotels revenue risk, without considering
the risk of exceeding the expected revenue. Parameter can be regarded as a risk-
aversion factor (risk trade-off factor) for the decision maker. Different values of the risk
factor represent the different risk aversions among decision makers. In the following
section, we will show that the expected revenue declines when the risk-aversion factor
increases.
The semi-absolute deviation in the third term of Equation (3) is a model robustness
measurement, without considering booking numbers below the corresponding demand,
and the parameters w
ti
are the penalty factors for constraint violations. By using
semi-absolute deviation values as penalties, the model can generate solutions which are
robust in all scenarios. The decision maker may improve room occupancy by changing
the corresponding weighting w
ti
.
In order to solve this model, we change it into a linear programming model, using a
linearisation method as shown below.


Booking models for hotel revenue management 85



Let
{ }
1 1 1 1 1
min 0, , min 0, ,
T I S T I
s s s s
s ti ti s ti ti ti ti ti
t i s t i
y r x p r x z D x
= = = = =


= =
`

)
__ _ __
so 0
s
y > , 0
s
ti
z > , and Equation (3) can be rewritten as follows:
1 1 1 1 1 1 1
1 1
1 1 1 1 1
max
s.t.
, 1, ,
0, 1, ,
, 1, , ; 1, , ; 1, ,
0, 1, ,
S T I S S T I
s s
s ti ti s s s ti ti
s t i s s t i
T I
ti
t i
T I S T I
s s
ti ti s ti ti s
t i s t i
s
s s
ti ti ti
s
ti
p r x p y p w z
x C
r x p r x y s S
y s S
D x z t T i I s S
z t

= = = = = = =
= =
= = = = =

s
> =
> =
> = = =
> =
_ __ _ _ __
__
__ _ __
!
!
! ! !
!
{ }
; 1, , ; 1, ,
max , 1, , ; 1, , ; 1, ,
0, 1, , ; 1, , .
s
ti ti
s
ti
T i I s S
x D t T i I s S
x t T i I
= =
s = = =
> = =
! !
! ! !
! !
(4)
Because 0
s
y > , 0
s
ti
z > , Equation (4) can be changed to:
1 1 1 1 1 1 1
1 1
1 1 1 1 1
max
s.t.
0, 1, ,
0, 1, ,
0, 1, , ; 1, , ; 1, ,
0, 1,
S T I S S T I
s s
s ti ti s s s ti ti
s t i s s t i
T I
ti
t i
T I S T I
s s
ti ti s ti ti s
t i s t i
s
s s
ti ti ti
s
ti
p r x p y p w z
x C
r x p r x y s S
y s S
D x z t T i I s S
z t

= = = = = = =
= =
= = = = =

s
+ > =
> =
+ > = = =
> =
_ __ _ _ __
__
__ _ __
!
!
! ! !
!
{ }
, ; 1, , ; 1, ,
max , 1, , ; 1, , ; 1, ,
0, 1, , ; 1, , .
s
ti ti
s
ti
T i I s S
x D t T i I s S
x t T i I
= =
s = = =
> = =
! !
! ! !
! !
(5)
If we take into account cancellations and no-shows and assume that the probabilities of
cancellations and no-shows are P
c
and P
n
, respectively, then we can change the first
constraint of Equation (3) to
1 1
(1 ) .
T I
c n ti
t i
P P x C
= =
s
__
A stochastic programming model for solving room booking strategy, considering
cancellations and no-shows, can be described as


86 S. Liu, K.K. Lai and S.Y. Wang



{ }
{ }
1 1 1 1 1 1 1 1 1
1 1 1
1 1
max min 0,
min 0,
s.t. (1 )
max , 1, , ; 1, , ; 1, ,
0, 1
S T I S T I S T I
s s s
s ti ti s ti ti s ti ti
s t i s t i s t i
S T I
s
s ti ti ti
s t i
T I
c n ti
t i
s
ti ti
s
ti
p r x p r x p r x
p w D x
P P x C
x D t T i I s S
x t

= = = = = = + = =
= = =
= =



`

)

s
s = = =
> =
_ __ _ __ _ __
_ __
__
! ! !
, , ; 1, , . T i I = ! !
(6)
The same applies to Equation (3). Equation (6) can be changed to a linear programme by
using the linearisation techniques. Equation (6) can be rewritten as
1 1 1 1 1 1 1
1 1
1 1 1 1 1
max
s.t. (1 )
0, 1, ,
0, 1, ,
0, 1, , ; 1, , ; 1, ,
S T I S S T I
s s
s ti ti s s s ti ti
s t i s s t i
T I
c n ti
t i
T I S T I
s s
ti ti s ti ti s
t i s t i
s
s s
ti ti ti
t
p r x p y p w z
P P x C
r x p r x y s S
y s S
D x z t T i I s S
z

= = = = = = =
= =
= = = = =

s
+ > =
> =
+ > = = =
_ __ _ _ __
__
__ _ __
!
!
! ! !
{ }
0, 1, , ; 1, , ; 1, ,
max , 1, , ; 1, , ; 1, ,
0, 1, , ; 1, , .
s
i
s
ti ti
s
ti
t T i I s S
x D t T i I s S
x t T i I
> = = =
s = = =
> = =
! ! !
! ! !
! !
(7)
Equations (5) and (7) are linear programmes, which can be solved by using the LINDO
software.
5 Illustrative examples
5.1 Single scenario example (deterministic)
We consider the single scenario example, i.e. an example of basic deterministic linear
programming. The planning horizon is set to five periods, the staying horizon is assumed
to be six days and the hotel has 200 rooms. For simplicity, the unit rates for each room
night during each of the five reserved periods are fixed at 0.76, 0.78, 0.80, 0.82 and 0.84,
respectively. The revenue for a one night stay-over is, therefore, linearly proportional to
the length of stay (in reality, the price of one room may change, depending on the
duration for which the customer stays). The parameters for the single scenario example
are all deterministic and, therefore, we solve this problem with only the standard linear
programme (Equation (1)). The demands for all pairs of (t, i) are listed in Table 1. The
optimal solutions are listed in Table 2. As can be seen from Table 2, the most of hotel


Booking models for hotel revenue management 87



rooms are booked in advance for multiple stays, and only 16 rooms are booked for walk-
ins staying for one day.
Table 1 Demand for single-scenario example (basic deterministic programming)
I
T
1 2 3 4 5 6
1 20 12 10 6 4 2
2 6 15 13 9 5 3
3 5 12 12 10 5 2
4 2 10 10 12 6 2
5 2 9 10 5 3 2
Table 2 Optimal solution for single-scenario example
I
T
1 2 3 4 5 6
1 16 12 10 4 2 1
2 0 15 13 9 5 3
3 0 12 12 10 5 2
4 0 10 10 12 6 2
5 0 9 10 5 3 2
5.2 Multiple scenario examples
5.2.1 Example 1
Assume that the decision maker faces three scenarios with unknown parameters and, for
each scenario, the corresponding probabilities are 0.2, 0.5 and 0.3. Suppose that the
decision maker will keep the unit room rate in every reservation period fixed at 0.76,
0.78, 0.80, 0.82 and 0.84, respectively, for all the three scenarios. The risk factor in this
example is equal to 1. For convenience, all the weightings
ti
w are set to be 1. Demand
under each scenario is listed in Tables 35, and the optimal solutions to this example are
listed in Table 6.
Table 3 Demand for multiple-scenario examples (scenario 1)
I
T
1 2 3 4 5 6
1 20 13 12 7 4 2
2 10 15 12 9 5 3
3 3 14 15 10 5 2
4 2 11 13 12 6 2
5 2 11 12 8 6 2


88 S. Liu, K.K. Lai and S.Y. Wang



Table 4 Demand for multiple-scenario examples (scenario 2)
I
T
1 2 3 4 5 6
1 15 12 10 6 4 2
2 6 13 12 9 5 3
3 3 10 12 10 5 2
4 2 10 10 12 6 2
5 2 9 10 5 3 2
Table 5 Demand for multiple-scenario examples (scenario 3)
I
T
1 2 3 4 5 6
1 10 10 8 6 4 2
2 6 10 10 9 5 3
3 3 11 8 7 5 2
4 2 9 10 9 6 2
5 1 8 9 5 3 2
Table 6 Optimal solution for multiple-scenario example 1 (fixed room rate)
I
T
1 2 3 4 5 6
1 0 12 12 7 4 2
2 0 12 12 9 5 3
3 0 10 15 10 5 2
4 0 10 13 12 6 2
5 0 9 12 8 6 2
5.2.2 Example 2
If the unit room rate differs under each scenario, the decision maker will obtain different
strategies. The unit room rate in each of the five periods for each of the three scenarios is
assumed to be (0.74, 0.76, 0.78, 0.80, 0.82), (0.76, 0.78, 0.80, 0.82, 0.84) and (0.78, 0.80,
0.82, 0.84, 0.86). The demand is the same as in the above example. In this example also,
the weightings
ti
w are equal to 1.
If the risk factor is equal to 1, the optimal solutions are as listed in Table 7. When the
risk factor takes different values, different values for expected revenue will be obtained.
These can be seen in Table 8 and Figure 1. Table 8 shows the detailed expected revenue
when choosing different risk trade-off values. Table 8 depicts the relationship between
the risk factor and the expected revenue. As can be seen from Table 8 and Figure 1, the
expected revenue is not increasing when the risk-aversion factor grows.


Booking models for hotel revenue management 89



Table 7 Optimal solution for multiple-scenario example 2 (different room rates for
different scenarios)
I
T
1 2 3 4 5 6
1 6 12 10 7 4 2
2 0 13 12 9 5 3
3 0 10 12 10 5 2
4 0 10 13 12 6 2
5 0 9 12 8 6 2
Table 8 Expected revenues with semi-absolute deviation method
Value of risk factor ()
Expected revenue
0.1 540.522
0.3 540.324
0.5 539.886
0.8 533.782
1 530.43
1.2 503.56
1.5 475.988
Figure 1 Relationship between expected revenue and risk factor
5.2.3 Penalty weights for feasibility robustness
The penalty weights for feasibility robustness are decision controls used by a decision
maker. Given that the semi-absolute deviation in the third term of problem (Equation (3))
is a model robustness measurement and the parameters
ti
w are the penalty factors for
constraint violations, the decision maker may improve room occupancy by changing the


90 S. Liu, K.K. Lai and S.Y. Wang



corresponding weighting
ti
w . For example, if the decision maker would like to accept
more customers for four-night stays, or accept more customers on a particular day, he can
decrease the corresponding weights or add more weights for other stays. Given the value
of risk factor is equal to 0.1, we illustrate this by example 2 in Section 5.2.2 by
decreasing the weights for bookings in period 1 for 3 days (such as
13
0.1 w = ), i.e. more
customers are accepted for this period (an increase from 10 to 12).
6 Conclusions
This paper studies a basic deterministic programming model and a stochastic
programming model with semi-absolute deviations for solving room reservations on a
future target day, for managing hotel revenue. In the stochastic optimisation model, the
semi-absolute deviation depicts the degree of the expected revenue deviation, while any
revenue exceeding the expected amount is not considered. As discussed in Section 3, this
method can be changed to a linear programming model, using linearisation techniques.
From the results of the examples illustrated in this paper, we conclude that the expected
revenue is not increasing when the risk-aversion factor grows.
Some restrictive conditions are discussed in the deterministic linear programming
model. A stochastic programming model with multiple scenarios, considering
cancellations and no-shows, is also proposed in this paper, to obtain room allocation
policy for each period. But using this model may lead to overbooking. If the actual
arrivals exceed the hotels capacity, the hotel should implement strategies to deal with
this problem, such as compensating or transferring customers. However, this may cause
dissatisfaction among customers (especially the loyal customers) and damage the hotels
reputation. Therefore, a rational decision is of critical importance in hotel reservations,
for optimisation of revenue without risking damage to reputation.
Acknowledgements
The authors are grateful for the helpful comments from the editor, Jason C.H. Chen, and
two anonymous reviewers of Int. J. Revenue Management. The work described in this
paper is supported by NSFC and the Strategic Research Grant of City University of Hong
Kong (Project No. 7001902).
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