Managing a hotel's perishable inventory using bid prices

Purpose-To determine conditions under which a hotel in Barbados can benefit from the use of revenue management. Design/methodology/approach-Monte Carlo simulation is used to compare a first-come first-served approach for accepting booking requests to a bid price approach. Comparisons are made using different assumptions about upgrading, downgrading and overbooking. Findings-When demand intensity is high, the bid price method yields higher revenue than the first-come first-served method. If demand intensity is low, but some necessary resources are scarce and the hotel practises upgrading and downgrading, then the bid price approach can also lead to improved revenue. No evidence was found to suggest that overbooking or downgrading costs affect the relative performances of the two approaches if these costs are taken into consideration. Research limitations/implications-This research was conducted for one type of hotel using a particular sample period and the conclusions will not necessarily be true for other sample periods and other types of hotels. Practical implications-The results show that hotels, which practise upgrading, downgrading and overbooking, should consider adopting a revenue management approach, when allocating their scarce resources among competing market segments. Originality/value-Existing linear programming models of the revenue management problem are extended here to allow for upgrading and downgrading, when one resource is substituted for another in a package, and to allow for overbooking, when the hotel cannot honour a booking because of the unavailability of some resource. This formulation emphasizes the efficient allocation of all of the hotel's scarce resources.