Stop clicking around and book direct: Impact of best rate guarantee on hotel pricing

Abstract

Hotel chains sell their rooms through both their own distribution channels and third-party online travel agencies (OTAs). However, with the growing popularity of OTAs over the last decade, major hotel chains have started to fight against OTAs for control and market share by offering Best Rate Guarantee (BRG) in an attempt to incentivize customers to bypass OTAs and book directly with the hotels. BRG ensures that guests who book direct will get the best price. We study a stylized model where a hotelier that works closely with an OTA offers BRG to its customers to maximize its revenue over a selling horizon. Motivated by common practices in the hotel industry, we model the hotelier-OTA decision making process as a sequential game. We focus on the case where there is a sufficient inventory, derive closed-form optimal solutions for the problem, prove some structural properties, and identify necessary and sufficient conditions under which offering BRG always benefits the hotel (resp. the OTA). While in general BRG makes the hotelier better off and the OTA worse off, we show that when the commission rate is high, BRG can make both channels better off. On the other hand, when the commission rate and the fraction of swing customers who claim BRG are both low, BRG can make both channels worse off. We also consider the case with a limited inventory in the appendix and derive various managerial insights regarding the impact of BRG through computational tests. Our findings will shed some lights for hotel managers when deciding whether to practice BRG and what relevant actions to take when BRG is practiced.