Service supply chain coordination with platform effort-induced demand

Abstract

In this study we investigate the effort of a service platform in cooperation with a hotel and its influence on the hotel’s decision about the quantity of reserved rooms. We begin with a newsvendor hotel facing two kinds of customers: D-customers and C-customers. The D-customers order rooms from the hotel’s front desk while the C-customers book rooms through a service platform, i.e., Ctrip.com. The hotel makes decisions about how many rooms to allot to Ctrip.com to achieve optimal profit. Two newsvendor settings are proposed that depict the demands of the two parties independently. We discuss a fixed payment contract and a cost sharing contract and find that the cost sharing contract achieves channel coordination and that the division of profit depends upon the hotel’s payment to Ctrip.com. We then extend our study by taking into consideration the effort Ctrip.com exerts. We verify that a cost sharing contract can achieve channel coordination imperfectly if the idle cost of a vacant reserved room is shared between the hotel and Ctrip.com. Further, given that the cost of effort is shared, the channel is coordinated and a win–win is guaranteed as well if the terms of the new cost sharing contract are properly chosen.