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Revenue Management Exercise

The document describes a problem faced by the Marriot Hotel regarding room pricing and reservation levels. It provides details on room types, standard and discount pricing, estimates of leisure and business traveler demand, and the potential costs of overbooking rooms. It then poses a series of questions about determining the optimal number of rooms to reserve at the standard price, the impact of a competitor lowering their price, calculating expected revenues and occupancy levels under different booking policies, and estimating the costs of different overbooking limits.

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Saurabh Chipade
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283 views1 page

Revenue Management Exercise

The document describes a problem faced by the Marriot Hotel regarding room pricing and reservation levels. It provides details on room types, standard and discount pricing, estimates of leisure and business traveler demand, and the potential costs of overbooking rooms. It then poses a series of questions about determining the optimal number of rooms to reserve at the standard price, the impact of a competitor lowering their price, calculating expected revenues and occupancy levels under different booking policies, and estimating the costs of different overbooking limits.

Uploaded by

Saurabh Chipade
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercise Problem

The Marriot Hotel has 150 rooms with standard queen-size beds and two rates: a full price of $200 and a discount price
of $120. To receive the discount price, customer must purchase the room at least two weeks in advance (this helps to
distinguish between leisure travelers, who tend to book early, and business travelers, who value the flexibility of booking
late). For a particular Tuesday night, the hotel estimates that the demand from leisure travelers could fill the whole hotel
while the demand from business travelers is normally distributed with a mean of 70 rooms and a standard deviation of
29.

a) Suppose 50 rooms are protected for full-price room. What is the booking limit for the discount rooms?
b) Find the optimal protection level for full-price rooms (the number of rooms to be protected from sale at a
discount price).
c) The Sheraton declared a fare war by slashing business travelers’ price down to $150. The Marriot had to match
that fare to keep demand at the same level. Does the optimal protection level increase, decrease, or remain the
same?
d) What number of rooms (on average) remains unfulfilled if we establish a protection level of 61 for the full-priced
rooms?
e) If the Marriot were able to ensure that every full-price customer would receive a room, what would Marriot’s
expected revenue be?
f) If the Marriot did not choose to protect any rooms for the full price and leisure travelers book before business
travelers, then what would Marriot’s expected revenue be?
g) Taking the assumption in part f and assuming now that Marriot protect 50 rooms for the full price, what is
Marriot’s expected revenue?

Due to customer no-shows, the Marriot is considering implementing overbooking. The forecast of no-shows is Poisson
with a mean of 15.5. The distribution and loss function of that distribution are as follows:

Y F(Y) L(Y) Y F(Y) L(Y) Y F(Y) L(Y)


8 0.0288 7.52 14 0.4154 2.40 20 0.8944 0.28
9 0.0552 6.55 15 0.517 1.82 21 0.9304 0.18
10 0.0961 5.61 16 0.6154 1.33 22 0.9558 0.11
11 0.1538 4.70 17 0.7052 0.95 23 0.9730 0.06
12 0.2283 3.86 18 0.7825 0.65 24 0.9840 0.04
13 0.3171 3.08 19 0.8455 0.44 25 0.9909 0.02

The Marriot is sensitive about the quality of service as it provides alumni. It estimates the cost of failing to honor a
reservation is $325 in lost goodwill and explicit expenses.

h) What is the optimum overbooking limit, i.e., the maximum reservations above the available 150 rooms that
Marriot should accept?
i) If Marriot accepts 160 reservations, what is the probability that Marriot will not be able to honor a reservation?
j) If Marriot accepts 165 reservations, what is the probability Marriot will be fully occupied? What is the
probability Marriot will be having a bumped customer?
k) If Marriot accepts 170 reservations, what is the expected total cost incurred due to bumped customers?

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