Optimal pricing strategy based on market segmentation for service products using online reservation systems: An application to hotel rooms

Abstract

As an effective policy which brings the service providers high occupancy rate and generates more profit than fixed pricing, the dynamic pricing strategy is extensively used in the online distribution channel. This paper studies the optimal dynamic pricing strategy based on market segmentation for service products in the online distribution channel taking hotel rooms as an example. Firstly, the pricing model is built to maximize the hotel profit through a dynamic process. Then the solution methodologies based on Chebyshev's Sum Inequality and dynamic programming are provided for the linear demand case and non-linear demand case, respectively. The optimal number of segments and optimal boundaries can be obtained. The results suggest that an appropriate policy of market segmentation in using of online reservation systems is benefit for the service suppliers as well as the consumers. Finally, an illustration based on a 300-room hotel is provided for the more realistic non-linear case.