An urgency model of reservation price for capacity constrained services

Abstract

Capacity constrained services such as airlines, hotels and automobile rentals frequently use differential pricing and inventory controls to optimize revenue. A model of reservation price for capacity constrained services is proposed that reflects the urgency created by three factors: the importance of the trip (level of loss), the time pressure (time remaining) in which to take action, and the supply constraint (the number of seats rooms or cars) available. It was hypothesized that the maximum amount the consumer is willing to pay is minimized if any one of the three factors is minimized. A simple 3 X 3 X 3 within-subject experiment was used to show that all hypotheses were supported.