Opening the online marketplace: An examination of hotel pricing and travel agency on-line distribution of rooms

Abstract

This paper studies the optimal pricing strategy of a hotel that establishes an online distribution channel through cooperation with an online travel agency (OTA). The OTA promotes the hotel and sells hotel rooms through its website and receives commission from the hotel for rooms sold. Through a sequence game model, this paper derives the optimal decision on the unit commission of the hotel and the optimal response of the OTA to that commission. The paper notes management implications, including (1) occupancy rate of a hotel before opening online marketing is an important metric for securing cooperation with an OTA; that is, a hotel with lower occupancy rates is more inclined to cooperate with an OTA to achieve an improvement in profits; and (2) a hotel is inclined to establish an online channel through an OTA with many online customers and/or few listed hotels.