Empirically Estimating Strategic Behavior for Hotel Standby Upgrade Programs

Abstract

Using a major hotel chain's 16-month booking data, we empirically investigate the existence and extent of strategic customers in the context of standby upgrades, a popular program offering availability-based, discounted premium-room upgrades. Customers, in particular loyalty members, may become knowledgeable about standby upgrades through repeated interactions with the hotel chain and act strategically, i.e., initially choose a standard room with the expectation of being offered a premium room discount through standby upgrades. We first develop a Maximum Likelihood Estimator to estimate the percentage of customers who are strategic. This estimator takes the sequential nature of customer decision-making for standby upgrades (original booking, clicking the standby upgrades banner ad, and requesting an upgrade) into account through a Sequential Logit Model. We find evidence of strategic behavior in three (out of eight) hotels examined. Our estimates suggest through different models of strategic behavior that 12% to 42% of the loyalty customers act strategically in these properties, located near major expressways or business areas. We then propose a new pricing policy to help hoteliers maximize their premium room revenues. This policy recommends a premium room discount, but also a higher standby upgrade price for loyalty customers, which can bring a revenue improvement of up to 19% over a policy ignoring the strategic behavior and 34% over a policy assuming that all customers are strategic.