An optimal, dynamic policy for hotel yield management

Abstract

Most research into the yield management problem has generated variations on the marginal seat revenue models that are based on simplifying assumptions about the demand process and heuristic decision rules. In this paper, a dynamic programming formulation of the problem is given allowing for general demand patterns and a policy that is based on time and the number of vacancies. Furthermore, this policy incorporates both revealed-price and hidden-price market behavior. It is shown that this formulation has a simple, closed-form solution that can be efficiently computed. As a result, a more general formulation of the problem with an optimal solution is available to hotels and airlines. The particular application that motivated this model development is that of yield management for small hotels.