Optimal Overbooking Decision for Perishable Resources with Jointly Stochastic Booking and Show-up Requests

Abstract

Overbooking is a methodology in revenue management to optimize important decision making for perishable resources or services with uncertain demand. Overbooking allows an incoming booking to be accepted in exceedance of an available capacity because it is believed that some booking will be cancelled later. It is a complicated and risky decision since the decision maker needs to minimize both outsourcing cost and opportunity-lost cost simultaneously. When there are two classes of resources, it is not necessary to always outsource the insufficient and Iow-priced resources. Upgrading customers to high-priced resources is possible. The objective of this research is to develop overbooking models for (1) one class of resources and (2) two classes of resources (ie, high and low price) to minimize total cost $(\mathrm {i}.\mathrm {e}.$, opportunity cost, cost of upgrading and outsource cost). The main contribution of this research is that, unlike other existing literatures, the opportunity cost considered is specifically identified in the situation where too much booking request rejection of each type of resources is present. Sensitivity analysis of our model is also shown for managerial insights.