Sizing the pool of online users: a dynamic pricing model for online travel agencies

Abstract

In the modern travel market, online travel agencies (OTAs) compete intensively for online users who are valuable resources that support the OTAs’ long-term development. To expand their pool of online users, a few OTAs use aggressive pricing strategies (e.g., providing extremely low price for newly enlisted customers). However, such approach can create other management issues (e.g., financial burden). Noting that pricing strategies for sizing the pool of online users are less addressed by current literature, this paper considers a dynamic pricing problem in which an OTA actively optimizes entrance prices for newly enlisted customers to encourage them to join the pool. The essence of this problem is how to achieve an adequately sized pool supporting long-term profit through dynamic pricing. By analysing this problem, several findings on the interplay between price choosing and pool sizing are obtained. First, we proved the monotonicity of the optimal entrance price relative to the pool size, which demonstrates the positive effect of pool size on pricing decisions. Second, we showed that the optimal entrance price would be lower than operational cost, resulting in negative profits from newly enlisted customers when the pool size is smaller than a breakeven point. Third, we characterised the steady-state pool size and revealed the eventual convergence of the pool size and the pricing decisions. This result implies that the OTA has two pricing strategies, namely, penetration and constant.