Int Trans Operational Res - 2017 - Ye - Optimal Online Channel Strategies For A Hotel Considering Direct Booking and

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Intl. Trans. in Op. Res. 26 (2019) 968–998 RESEARCH
DOI: 10.1111/itor.12470
Optimal online channel strategies for a hotel considering direct

booking and cooperation with an online travel agent
Fei Ye, Hui Yan and Yongzhong Wu∗
School of Business Administration, South China University of Technology, No. 381 Five Mountain Road, Guangzhou
510640, China
E-mail: yefei@scut.edu.cn [Ye]; yanhuiboy@163.com [Yan]; bm_wyz@scut.edu.cn [Wu]
Received 25 November 2016; received in revised form 9 July 2017; accepted 10 September 2017
Abstract
This paper studies the channel strategies for a hotel considering alternative online distribution channels. The
decision for the hotel involves whether to rely on direct booking via its official website or cooperating with an
online travel agent (OTA), and if the latter is suggested, what business model to be adopted for the cooperation
with the OTA. Three mathematical models, i.e., direct booking model, OTA merchant model, and OTA agent
model, are developed to evaluate the costs and benefits in the three different cases. The negotiation process in
the OTA agent model is studied by using the generalized Nash bargaining solution. The optimal decisions and
profits are analyzed with respect to the values of key parameters. Results of numerical examples are discussed
to show the implications of the established models.
Keywords: supply chain management; channel strategy; bargaining; online travel agent
1. Introduction
Due to the rapid development of information technology, it has been common nowadays for people
to plan their traveling services online. About 80% of the travelers use the internet to search for
hotel information (Toh et al., 2011). Besides hotels’ official websites, booking via the online travel
agencies (OTAs) has become very popular. Since the launch of Expedia in 1996, Priceline in 1997,
Hotwire in 2000, and the introduction of many other OTAs, the landscape for hotel distribution
channels has changed drastically. OTAs have taken a substantial share from traditional contracted
booking channels, mainly wholesalers and tour operators.
In the beginning, most hotels were keen to cooperate with OTAs to improve occupancy rates and
maximize profit. Much research focuses on revenue management for hotels cooperating with OTAs.
For example, Koide and Ishii (2005), Sierag et al. (2015), and Chua et al. (2016) present models
studying hotel room allocations with early-discount, cancellation, and overbooking facilitated by
OTAs. Ling et al. (2015) propose a method for hotels to cooperate with an OTA by managing the
∗
Corresponding author.

C 2017 The Authors.
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F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 968–998 969
availability of hotel rooms for the OTA to maximize their profit. Van der Rest et al. (2016) study
how the position of a hotel on the OTA’s search page influences the likelihood of being booked.
While OTAs undoubtedly gain high exposure to customers, their services do take a significant bite
out of the profit for hotels (Gazzoli et al., 2008). It is reported that OTAs typically receive a 15% to
20% commission on booking in the United States (Scott, 2015). For this reason, OTAs have become
a hot potato for hotels in recent years. Some hotels consider reducing or even avoiding the reliance
on OTAs through efforts to increase direct bookings. Hotels like Hilton, Marriott, and Hyatt spent
much effort and money on marketing direct bookings and loyalty in 2016. Similar campaigns have
been taken by other hotels, including InterContinental Hotels and Choice Hotels.
However, there are significant difficulties for hotels to rely on the direct booking channel. First
of all, the investment in a hotel’s direct booking channel is considerable. A significant amount of
cost needs to be spent on developing and operating the official website with effective direct booking
system and customer support, promoting such direct booking channel, and relevant management
costs. Besides the cost, the limited amount of potential customers in the reach of the direct booking
channel is another issue. As an example, Room Key, founded by six major hotel chains (Choice,
Hilton, Hyatt, IHG, Marriott, and Wyndham) in 2012, was considered to be the hotels’ own travel
portal to avoid the high commission fees of OTAs. After a few years, Room Key is still facing the
difficulty of the small number of visitors compared to the common OTAs (Ting, 2016). To increase
the direct booking, the hotels need to spend great efforts in marketing practices like loyalty programs
to foster the customer relationship. Fatma and Rahman (2017) suggest that hotel marketers should
even adopt a higher level of marketing practices such as ethically responsible practices and programs.
The difficulties for direct booking channel, together with the costs and benefits for cooperating
with OTAs, have influence on the optimal channel strategy for the hotel supply chain. In the
literature, much research has been conducted on the service supply chain management (Wang
et al., 2015). In particular, Canakoglu and Bilgic (2007) study a telecommunication supply chain
and find that a well-designed quantity discount contract can achieve coordination under such a
system. Hasija et al. (2008) study how a call center service provider can help achieve supply chain
coordination with different supply chain contracts. Oliveira et al. (2013) study how supply chain
contracts achieve channel coordination in the electricity industry. Most of the existing research on
channel strategies mainly focuses on the manufacturing industry. Yao and Liu (2003) develop a
dynamic channel diffusion model between an e-tail (online) channel and a retail (offline) channel.
Drèze and Bell (2003) consider a model with a retailer and a manufacturer, and compare the effects
of two different contractual arrangements for trade promotions. Chen and Bell (2011) structure a
Stackelberg model with a manufacturer and a retailer, and study the case of buyback policies and
customer returns. Yan (2015) study the decision problem of joint pricing and product quality in a
decentralized supply chain with one manufacturer and one retailer. Yao and Liu (2005) study the
price competition between regular retail distribution channels and e-tail distribution channels under
the Stackelberg and the Bertrand model. Cai (2010) provides comparisons among four models of
channel selection, including single-channel and dual-channel models.
When a hotel chooses to cooperate with an OTA, it needs to decide which cooperating mode to be
adopted. The cooperating modes between the hotel and the OTA include agent model and merchant
model. For example, Orbitz is solely using merchant model and Booking is solely using agent model.
Most OTAs, including Expedia, Hotel, and Lastminute, are using both models when cooperating
with hotels (Lee et al., 2013). With a merchant model, a wholesale contract is formed where the

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970 F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 968–998
rooms are first sold to the OTA at a wholesale price and then the OTA sells the rooms to customers at
a price determined by the OTA itself. Comparatively, with an agent model, a consignment contract
is formed where the hotel allocates a number of rooms to the OTA for consignment. The hotel
shares a portion of profit (commission fee) with the OTA after the room is sold on OTA’s online
channel. The agent model is further complicated by the negotiation between the hotel and the OTA
on both the commission fee and the sale price for the customers.
In the literature, the cooperating modes in manufacturing supply chain have been extensively
studied. For example, Pan et al. (2010) study the merchant model and the agent model in a supply
chain channel with two manufacturers and one retailer. Matta et al. (2014) study the retailer and
supplier preferences of merchant and agent models and incentives for compromise. Chakraborty
et al. (2015) study the coordination and competition in a retail channel with wholesale price and
revenue-sharing mechanisms. Comparatively few researchers have studied the cooperating models
between hotel and OTA. In particular, Liao et al. (2015) study the cooperation between hotel and
OTA under merchant model and agent model, without considering direct booking channel. They
find that, compared to the pure merchant model, using both models to sell rooms always improves
the hotel’s profit. However, their paper does not consider the demand as a function of the sale price,
which should have significant impact on the results. Furthermore, the negotiation of the commission
fee in the agent model is not considered in their research.
The negotiation process between OTA and hotel arising from the agent model has not been
studied. In the literature, there has been research focused on the negotiation process in the context
of a general supply chain. Among these, Fudenberg and Tirole (1991) and Muthoo (1999) provide
a detailed introduction of bargaining theory. Dukes and Gal-Or (2003) apply the Nash bargaining
solution to study an advertising problem. Nagarajan and Sošić (2008) study cooperative bargaining
in a supply chain. Rubinstein (1982) studies the Rubinstein alternating-offers model in which two
parties split a pie. Wu (2004) establishes the coordinating contracts using the Rubinstein model.
Kuo et al. (2013) consider the choice of pricing policy (posted pricing or negotiation pricing) toward
customers in a supply chain. For negotiation of price, they use the generalized Nash bargaining
solution (GNBS) and the price is decided by both the retailer and the customer.
Given the above discussion, this paper focuses on the optimal online channel strategies for hotels.
Specifically, the following questions are studied: the conditions under which the hotel should rely
on direct online booking channel; and if the hotel decides to cooperate with an OTA, the optimal
business model with which the hotel should cooperate with the OTA. We establish and compare
the models in three situations, i.e., direct booking model, OTA merchant model, and OTA agent
model, for the maximization of the hotel’s profit. Impacts of key parameters, including the sizes of
customer populations in the direct booking channel and the OTA channel, the hotel room capacity,
and the commission rate, on the optimal decisions, price, and profits of the hotel are examined both
analytically and numerically. The findings do not necessarily suggest that the hotel should rely on
only one of the direct booking or OTA channels. Rather, as most hotels nowadays rely on both
direct booking and OTA channels, the findings provide hoteliers useful insights when they consider
any strategic moves or campaigns toward the OTAs. Nonetheless, as an extension of this work, we
further discuss the dual channel model with a numerical study, although an analytical solution is
lacking due to model complexity.
The remainder of this paper is organized as follows: Section 2 establishes the three models, i.e.,
direct booking model, OTA merchant model, and OTA agent model. Model analysis is conducted

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in Section 3. Section 4 presents the results of the numerical examples. A discussion of the dual
channel model is presented in Section 5. Section 6 concludes the paper.
2. Model description
We study the decision of a hotel on whether to sell its rooms through direct booking channel via
official website or through cooperation with an OTA. Offline selling channels (like walk-in and
phone booking) are not considered. There are three different ways for a hotel to sell its room online:
direct booking through hotel’s official website, collaborating with an OTA in merchant model, and
collaborating with an OTA in agent model, which is depicted in Fig. 1.
We assume that there is only one type of room for sale, which is the same assumption adopted by
Cai (2010). The capacity K of the hotel, which would be sold online, is fixed. Related notations and
symbols are listed in Table 1.
Exponential demand models have been extensively used as demand functions (Jeuland and
Shugan, 1988; Hanssens and Parsons, 1993; Song et al., 2008; Kuo and Huang, 2012; Kuo et al.,
2013). In this study, we define the valuation distribution function in exponential form which depends
on the effective price paid by customers as follows:
F (p) = 1 − e−λp, (1)
where λ is the price-sensitive parameter. Given the room price p, only customers who value the
room at p or larger will buy the room. So, function F (p) := 1 − F (p) = e−λp is the fraction of the
customers who value the room at p or larger. Obviously, Ni F (p) is the portion of the customers with
valuation p or greater, with Ni being the size of the customer population (note that i = 1 represents
the direct booking channel and i = 2 represents the OTA channel).
In the merchant model, a wholesale contract is formed with which the hotel sells a certain quantity
of rooms to the OTA at a wholesale price. The sale price for customers is determined by the OTA.
Without loss of generality, we assume that the hotel determines the wholesale price first. Then,
the OTA determines the sales price subsequently. It is further assumed that the OTA’s purchasing
quantity from the hotel is the same as the demand, which is determined by the demand function.
Although demand uncertainty does exist in reality, this is not considered in this paper. In the agent
model, a consignment contract is formed where the OTA acts as an agent and arranges bookings
for rooms owned by the hotel at agreed-on sale price, and receives an agreed-on commission for
Fig. 1. Three alternative ways for selling rooms online.

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Table 1
Definition of variables and symbols
Variables and parameters Definition

K Hotel’s capacity (excluding offline channels)
N1 Size of customer population on direct booking channel
N2 Size of customer population on OTA channel
p Unit price of hotel room
F (p) Valuation distribution
F (p) Fraction of the customers who value the room at p or larger
c0 Unit cost of OTAfor cooperating with hotel
c1 Unit cost of hotel for direct booking
c2 Unit cost of hotel for cooperating with OTA
φ ∈ (0, 1) Commission rate in the agent model
β ∈ (0, 1) Relative bargaining power of OTA in the agent model
λ Price sensitive parameter
puD Optimal price that maximizes the hotel’s profit in the direct booking model when hotel
capacity is not restricted.
pD Marketing clearing price in the direct booking model at which hotel capacity equals the
demand
wuM Optimal wholesale price that maximizes the hotel’s profit in the merchant model when
hotel capacity is not restricted
puM Optimal price that maximizes the OTA’s profit in the merchant model when hotel
capacity is not restricted
wM Marketing clearing wholesale price in the merchant model at which hotel capacity equals
the demand
pM Marketing clearing price in the merchant model at which hotel capacity equals the
demand
φNu Final commission rate agreed after negotiation in the agent model when hotel capacity is
not restricted.
puN Final price agreed after negotiation in the agent model when the hotel capacity is not
restricted.
φN Final commission rate agreed after negotiation in the agent model at which hotel
capacity equals the demand.
pN Marketing clearing price in the agent model at which hotel capacity equals the demand:
each transaction. Both the sale price and the commission fee are negotiated between the hotel and
the OTA.
2.1. Direct booking model
The constructing and advertising of a hotel official website for direct booking needs considerable
investment. The size of customer population of the direct booking channel N1 is critical, in that the
unit cost c1 could become so high. Given price p and hotel’s capacity K, the hotel’s profit is
πHD = N1 e−λp (p − c1 )
(2)
s.t. N1 e−λp ≤ K.

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Optimizing (2) with respect to p yields the following first- and second-order conditions:

πHD (p) = N1 e−λp (1 − λ(p − c1 )) = 0, (3)
and

πHD (p) = −λN1 e−λp (1 − λ(p − c1 )) − λN1 e−λp < 0. (4)
Define puD as the optimal price that maximizes the hotel’s profit in the direct booking model
when the hotel capacity is not restricted. Note that when the hotel capacity can satisfy the demand,
maximization of (2) yields the price as
1
puD = + c1 . (5)
λ
Define pD as the marketing clearing price at which hotel capacity equals the demand: N1 e−λpD =
K. When the demand exceeds hotel capacity, i.e., N1 e−λ(c1 + λ ) > K, there exists the market-clearing
1
price, pD , at which N1 e−λpD = K due to the reason that πHD (p) is concave in (3) and (4). It is also
found that if K is big enough, pD = − λ1 ln( NK ) does not exist, and the hotel tends to set the price
1
higher than pD . Naturally, if the price is below pD , the hotel could raise the per-unit profit margin
without changing the quantity sold.
2.2. OTA merchant model (or merchant model)
We adopt a supplier-Stackelberg leader game to analyze the OTA merchant model, where the hotel
determines the wholesale price first and the OTA determines the sale price subsequently. Due to
competition in the market, the OTAs need to spend significant amount of money in advertising and
securing customers. Thus, there is a unit cost c0 of the OTA incurred, which is the lower bound
for the unit profit for the OTA to cooperate with the hotel. At the same time, there also exists the
unit cost c2 for the hotel cooperating with the OTA, which should be less than c1 that incurs in the
direct booking model. Given price p, wholesale price w, and hotel capacity K, the OTA’s and hotel’s
profits are
πOM = N2 e−λp (p − w − c0 ); πHM = N2 e−λp (w − c2 )

(6)
s.t. N2 e−λp ≤ K.
Because OTA is the follower in the Stackelberg game and decides the effective price, optimizing
OTA’s profit with respect to p yields the following first- and second-order conditions:

πOM (p) = N2 e−λp (1 − λ(p − w − c0 )) = 0, (7)
and

πOM (p) = −λN2 e−λp (1 − λ(p − w − c0 )) − λN2 e−λp < 0. (8)

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Define puM as the optimal price that maximizes the OTA’s profit and wuM as the optimal wholesale
price that maximizes the hotel’s profit in the merchant model, given that the hotel capacity is not
restricted. Note that when the hotel capacity can satisfy the demand, maximization of πOM yields
the price as follows:
1
puM = + c0 + w. (9)
λ
Then, the response of hotel’s profit function changes to
πHM (w) = N2 e−λ( λ +c0 +w ) (w − c2 ).

1
(10)
As the hotel is the leader and decides the wholesale price w first, optimizing the hotel’s profit (10)
with respect to w yields the following first- and second-order conditions:
πHM (w) = N2 e−λ( λ +c0 +w ) (1 − λ(w − c2 )) = 0,

1
(11)
and
πHM (w) = −λN2 e−λ( λ +c0 +w ) (1 − λ(w − c2 )) − λN2 e−λ( λ +c0 +w ) < 0.
1 1
(12)
Note that when the hotel capacity can satisfy the demand, maximization of πHM (w) yields the
wholesale price as follows:
1
wuM = + c2 . (13)
λ
More specifically, we obtain puM = λ1 + c0 + w = λ2 + c0 + c2 . It indicates that if all else being

equal, the larger the wholesale price, the more expensive the effective price, and vice versa. Define
wM as the marketing clearing wholesale price and pM as the marketing clearing price at which hotel
capacity equals the demand: N2 e−λ( λ +c0 +w p ) = K. When the demand exceeds the hotel capacity
1
due to low wholesale price, i.e., N2 e−λ( λ +c0 +w) > K, there exists the market-clearing wholesale
1
price wM at which N2 e−λ( λ +c0 +w) = K because πHM (w) is concave in (11) and (12). Obviously, we
1
obtain the market-clearing wholesale price wM = − λ1 ln( NK ) − λ1 − c0 , and the market-clearing price
2

pM = − λ1 ln( NK ) by setting πHM (w) = 0. If the wholesale price is below wM , the hotel can raise the
2
per-unit profit margin without changing the quantity sold. For this reason, the hotel should set
wholesale price over wM .
2.3. OTA agent model (or agent model)
In the OTA agent model, the hotel sells its rooms through an OTA and pays the OTA commission
fee. Given the effective price p and the commission rate φ, the hotel should pay the OTA φ p for

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each sold room (no money transaction unless a room is sold). The unit costs of hotel and the OTA
are c2 and c0 , respectively. For a given capacity K, the profits of the OTA and the hotel are
πON = N2 e−λp (φ p − c0 ); πHN = N2 e−λp ((1 − φ)p − c2 )

. (14)
s.t. N2 e−λp ≤ K
Kuo and coworkers (2012, 2013) propose the generalized Nash bargaining solution, in which a
customer (acts as a bargainer) would buy product at a transaction price according to the GNBS.
The GNBS has been commonly used to describe the outcome of negotiation in the literature (Bester,
1993; Wang, 1995; Arnold and Lippman, 1998; Muthoo, 1999; Desai and Purohit, 2004; Roth et al.,
2006). In this paper, we use the GNBS to analyze the negotiation between the hotel and the OTA in
the agent model.
The total surplus is split between the hotel and the OTA under GNBS. Let β be the relative
bargaining power of the OTA and 1 − β be the relative bargaining power of the hotel (β ∈ (0, 1)).
We define φNu and puN as the agreed commission rate and price after negotiation when the hotel
capacity is not restricted. Based on the aforementioned discussion, we can characterize the optimal
commission rate and price agreed by both parties after negotiation as
β 1−β
φNu , puN = arg max{(N2 e−λp (φ p − c0 )) (N2 e−λp ((1 − φ)p − c2 )) }
φ,p
φ p − c0 > 0;
(1 − φ)p − c2 > 0; (15)
subject to
0 < φ < 1;
0 < β < 1;
Note that the party who has relatively higher bargaining power will gain more surplus. Obviously,
this is an extreme value problem about binary function. To keep it simple, we denote G(φ, p) =
β 1−β
maxφ,p (N2 e−λp (φ p − c0 )) (N2 e−λp ((1 − φ)p − c2 )) . We characterize the stable point of binary
function G(φ, p) as follows:
⎧ β

⎪
⎪ −λp φ p − c0 (1 − φ)p − c2
⎪ G
⎨ φ = pN e β − (1 − β ) =0
2
(1 − φ)p − c2 φ p − c0
β
(16)
⎪
⎪ φ p − c0 (1 − φ)p − c2
⎪
⎩Gp = N2 e−λp −λ[(1 − φ)p − c2 ] + βφ + (1 − β )(1 − φ) = 0.
(1 − φ)p − c2 φ p − c0
Define (φ0 , p0 ) to be the stable point which satisfies function (16). The Hessian matrix of G(φ, p)
is negative definite at this stable point, because
β
β p2 N2 e−λp φ p − c0
Gφφ = (co + c2 − p) < 0 (17)
(φ p − c0 )2 (1 − φ)p − c2
β
G Gφ p λβ p2 N2 e−λp

φ p − c0
φφ
= ((1 − φ)p − c2 ) > 0. (18)
G pφ G pp (φ p − c0 )2 (1 − φ)p − c2

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Through functions (16), (17), and (18) we obtain the stable point (φ0 , p0 ) which is the maximum
value point. It shows that when the hotel capacity satisfies the demand, the optimal price puN equals
p0 obtained from function (16), which is λ1 + c0 + c2 , and the optimal commission rate φNu equals φ0
β
λ +c0
obtained from function (16), which is +c
. We can find that the commission rate increases with
0 +c2
1
λ
the increase of the bargaining power of OTA β and the unit cost of OTA c0 , but decreases with the
increase of the unit cost of hotel c2 .
Define pN as the marketing clearing price at which hotel capacity equals the demand: N2 e−λpN = K
in agent model. When the demand exceeds hotel capacity, i.e., N2 e−λ(c1 +c2 + λ ) > K, it results in the
1
existence of the market-clearing price, pN , at which N1 e−λpN = K. The final commission rate should
maximize the following problem:
β 1−β
φN = arg max (N2 e−λpN (φ pN − c0 )) (N2 e−λpN ((1 − φ)pN − c2 )) . (19)
φ
Optimizing function (19) with respect to φ yields the following first- and second-order conditions:
β

φ pN − c0 (1 − φ)pN − c2
Gφ = pN N2 e −λpN
β − (1 − β ) = 0, (20)
(1 − φ)pN − c2 φ pN − c0
and
β
φ pN − c0 c0 + c2 − pN
Gφφ = β pN 2 N2 e−λpN < 0. (21)
(1 − φ)pN − c2 (φ pN − c0 )2
Then, we obtain the optimal commission rate φ through function (20):

β pN − (c0 + c2 )β + c0 (c + c2 )β + c0
φN = =β− 0 . (22)
pN − λ1 ln NK
2
In Table 2, we summarize the optimal price, unit profit, and profit for the three models with
exponential demand function.
3. Model analysis
In this section, we analyze optimal decision of the hotel through the established models. The analysis
of the optimal decision is conducted for three different cases. In Case I, we assume that the hotel has
decided to cooperate with the OTA and needs to decide the optimal business model for cooperating
with the OTA, i.e., the merchant model or the agent model. In Case II, the hotel decides whether
to sell rooms through direct booking or cooperation with the OTA in the merchant model. In Case
III, the hotel chooses among the three different channels. In Case IV, we take the OTA’s perspective
and compare the OTA’s profits in the OTA merchant model and the OTA agent model.
Before characterizing the technical propositions of the optimal decisions, the following assump-
tion on bargaining power is made.

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Table 2
Optimal price, unit profit, and profit in three models with exponential demand function
Merchant model
Wholesale Hotel’s unit OTA’s unit
Condition Price price Sales profit profit Hotel’s profit OTA’s profit
−λ(co +c2 + λ2 ) −λ(co +c2 + λ2 ) 1 1 1 −λ(co +c2 + λ2 ) 1 2
N2 e ≤K co + c2 + λ2 c2 + λ1 N2 e λ λ
Ne
λ 2
N e−λ(co +c2 + λ )
λ 2
2 1 1
N2 e−λ(co +c2 + λ ) > K − λ1 ln( NK ) − λ1 ln( NK ) − K − λ1 ln( NK ) − λ
K ((− λ1 ) ln( NK ) − λ
K
2 2 2 2
1 1 1
λ
− c0 λ
− c0 − c2 λ
− co − c2 )
Agent model

Condition Price Commission Sales Hotel’s unit OTA’s unit Hotel’s profit OTA’s profit
rate profit profit
1 1 1 1
1 βc2 −(1−β )c0 1 1 1 1
N2 e−λ( λ +c0 +c2 ) ≤ λ
+ c0 + c2 β− 1 N2 e−λ(co+c2 + λ ) λ
(1 − β) λ
β N e−λ( λ +c0 +c2 )
λ 2
N e−λ( λ +c0 +c2 ) β
λ 2
λ +c0 +c2
K (1 − β )
1 βc2 −(1−β )c0
N2 e−λ( λ +c0 +c2 ) > − λ1 ln( NK ) β− K (− λ1 ln( NK ) − (− λ1 ln( NK ) − K ((− λ1 ) ln( NK ) − K ((− λ1 ) ln( NK ) −
2 − λ1 ln( NK ) 2 2 2 2
K 2
c0 − c2 )(1 − β ) c0 − c2 )β c0 − c2 )(1 − β ) c0 − c2 )β
Direct booking model
F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 968–998
Condition Price Sales Hotel’s unit profit Hotel’s profit

−λ(c1 + λ1 ) −λ(c1 + λ1 ) 1 1 1
N1 e ≤K c1 + λ1 N1 e λ
N e−λ(− λ +c1 )
λ 1
−λ(c1 + λ1 )
N1 e >K − λ1 ln( NK ) K − λ1 ln( NK ) − c1 K[(− λ1 ) ln( NK ) − c1 ]
1 1 1

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977
Assumption 1. It is assumed that the bargaining power of OTA β is more than 0.5, meaning that
the OTA has greater bargaining power than hotel. This is a reasonable assumption for the existing
situation where the hotel sales are dominated by OTAs (Pan et al., 2013).
Case I: Comparison between the merchant model and the agent model
When the hotel decides to cooperate with an OTA, the optimal sales price and business model
should be determined. By evaluating the hotel profits in the OTA merchant model and OTA agent
model, the following result is obtained:
Lemma 1. For the hotel, the optimal choices, conditional on the ranges of the size of the customer
population of OTA channel N2 , and bargaining power of OTA β, are as follows:
β N2 Hotel’s channel strategies

1−β < 1
e
Merchant model
1−β > 1
e
N2 < N2 Agent model
N2 > N2 Merchant model
Proofs of all Lemmas, Remarks, and Propositions can be found in the Appendix.
2
N2 e−λ( λ +c0 +c2 )
Remark 1. Marginal value N2 is increasing in hotel capacity K, which satisfies λ
=
K[(1 − β )(− λ1 ln( NK ) − c0 − c2 )] .
2
Lemma 1 indicates that when the bargaining power of hotel is too low, the hotel should adopt
the merchant model. This is intuitive because the lower the bargaining power of hotel, the more
commission the hotel is likely to pay the OTA.
When the bargaining power is big enough (1 − β > 1e ), the optimal decision for the hotel depends
on the size of the customer population of the OTA channel N2 . When N2 is so small that hotel rooms
cannot be sold out in both models, the agent model outperforms the merchant model in terms of
the maximization of hotel profit. When N2 is big enough for the hotel rooms to be sold out in
both models, the merchant model outperforms the agent model. As shown in Lemma 1, the hotel
performs better in the agent model than in the merchant model when N2 is less than a certain edge
(N2 < N2 ). This edge appears when the hotel rooms are sold out in the agent model but not in the
merchant model because the price in the merchant model is always bigger than in the agent model
(Table 2). In this case, the price in the agent model would be increased to control the sales, so both
the price and the profit of the hotel increase in capacity in the agent model but remains constant in
the merchant model. Therefore, the edge increases in the hotel capacity.
Case II: Comparison between the direct booking model and the merchant model
Comparing the corresponding profits in the direct booking model and the merchant model leads to
the following result.
Lemma 2. For the hotel, the direct booking model outperforms the merchant model if
1 N 1
− ln 1 − − c0 + c1 − c2 < 0. (23)
λ N2 λ

C 2017 The Authors.
Function (23), which can be transformed into N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) , means that the sales
1 2
in the direct booking model is no less than that in the merchant model, and the unit profits in both
models are the same (Table 2); Lemma 2 indicates that the hotel’s decision on choosing between
the direct booking and the merchant model does not rely on hotel capacity. According to function
(23), if the ratio N1 /N2 , the total cost for hotel and OTA cooperation cT : cT = c0 + c2 , and the
cost variance c1 − cT are given, the optimal decision of the hotel is fixed. When N1 increases and c1
decreases, the direct booking model outperforms the merchant model.
Case III: Comparison of three different models

In the above discussion, we have compared the merchant model with the agent model, the direct
booking model with the merchant model. In the following, comparison among the three models is
given.
Proposition 1. For the hotel, the optimal choices among the three models, conditional on the ranges of
the customer population sizes (N2 , N1 ) and bargaining power β, are as follows:
β (N2 , N1 ) Hotel’s channel strategies

N1
1−β < 1
e
− λ1 ln N2
− λ1 − c0 + c1 − c2 > 0 Merchant model
N
− λ1 ln N1 − λ1 − c0 + c1 − c2 < 0 Direct booking model
2
1−β > 1
e
N2 < N2 ; f1 (N1 , N2 , K ) > 0; Direct booking model
N2 < N2 ; f1 (N1 , N2 , K ) < 0; Agent model
N
N2 > N2 ; − λ1 ln N1 − λ1 − c0 + c1 − c2 > 0 Merchant model
2
N
N2 > N2 ; − λ1 ln N1 − λ1 − c0 + c1 − c2 < 0; Direct booking model
2
Remark 2. Function f1 (N1 , N2 , K ) = 0 is used to characterize the relation between N1 and N2 when
the hotel’s profit in the direct booking model and that in the agent model are equal, which is a
piecewise function described as
⎧
−λ(c0 +c2 )
λc
0 < N1 < Keλ( λ +c1 ) and 0 < N2 < Keλ( λ +c0 +c2 )
1 1
⎪
⎨N1 − e 1 N2 e (1 − β ) = 0,

⎪ 1 K
⎩N1 − e λ (λ+c1 ) λK (1 − β ) = 0, 0 < N1 < Keλ( λ +c1 ) and N2 > Keλ( λ +c0 +c2 ) .
1 1 1
− ln − c0 − c2
λ N2
Note that N1 is increasing in N2 and K.
Decision analysis in the case of 1 − β < 1e and 1 − β > 1e , N2 > N2 has been explored in Lemma 1
and Lemma 2. The results in the case of 1 − β > 1e , N2 < N2 are intuitive. When f1 (N1 , N2 , K ) > 0,
N1 is big enough compared to N2 and the hotel is popular enough in its own official website to make
that the direct booking model outperforms the agent model.
In the agent model, the price and sales of the hotel will be constant or increasing when N2
increases when N2 < N2 . In the direct booking model, the price will be constant and sales will be
increasing when N1 increases. In addition, the price and sales of the hotel are constant or increasing
in hotel capacity in the agent model but constant in the direct booking model when N2 increases
till N2 . The results also show that when K increases, the chance for the hotel to adopt agent model
increases if all else is equal.

C 2017 The Authors.
The hotel optimal decisions based on N1 and N2 can be described as follows:
(1) when N1 /N2 > k1 , the hotel adopts the direct booking model;
(2) when N1 /N2 < k2 , the hotel adopts the OTA models (the merchant model or the agent model);
(3) when k2 < N1 /N2 < k1 and N2 > N2 , the hotel adopts the direct booking model; otherwise, the
hotel adopts to cooperate with OTA in the agent model.
Remark 3. k1 = e−λ(c0 +c2 −c1 ) (1 − β ), k2 = e−λ( λ +c0 +c2 −c1 ) , obviously, k1 > k2 because of 1 − β >
1 1
e
.
Intuitively, the costs should also play great influence on the hotel decision besides the sizes of
the customer population. The following proposition analyzes the impact of costs on hotel channel
decisions.
cost (c1 , c2 ) and bargaining power of OTA β, are as follows:
(c1 , c2 ) (c1 , c2 ), β Hotel’s channel strategies

N1
− λ1 ln N2
− 1
λ
− c0 + c1 − c2 < 0 f2 (c1 , c2 , K ) > 0 Agent model
f2 (c1 , c2 , K ) < 0 Direct booking model.
N1
− λ1 ln N2
− 1
λ
− c0 + c1 − c2 > 0 1−β < 1
e
Merchant model
1−β > 1
e
, c2 > c2 Agent model
1−β > 1
e
, c2 < c2 Merchant model

Remark 4. Marginal value c2 is increasing in hotel capacity K, which satisfies N2 e−λ( λ +c0 +c2 ) 1−β
1
λ
=
K[(− λ1 ln( NK ) − λ1 − c0 − c2 )].
2
Function f2 (c1 , c2 , K ) = 0 is used to describe the relation between c1 and c2 when the hotel’s
profit in the direct booking model and that in the agent model are equal, which is a piecewise
function described as
⎧
⎪ N e−λ(c1 + λ )
1
⎪
⎪
1 K
N2 e−λ( λ +c0 +c2 ) < K < N2 e−λ( λ +c0 +c2 )
2 1
⎨c2 + ln + co + 1 = 0,
λ N λK (1 − β )
2
⎪
⎪ 1 N1 1 N1
⎪
⎩c2 + ln + c0 − c1 = 0, K > N2 e−λ( λ +c0 +c2 ) and −
1
ln − c0 + c1 − c2 > 0.
λ N2 (1 − β ) λ N2
Note that c1 increases in c2 but decreases in K.
Proposition 2 shows that when c1 is low enough compared to c2 , the hotel should adopt the direct
booking model. The result is intuitive because low cost means low price and high sales. When c1 is
high and c2 is low, the hotel should adopt the merchant model. This is because that the cost for the
direct booking channel is too high and the hotel needs to cooperate with an OTA. Low c2 means
low price on the OTA channel. At the same time, as bargaining power of the hotel is always less
than 0.5, both parties are glad to cooperate in the merchant model.
The hotel optimal decisions based on c1 and c2 can be described as follows:
(1) when c1 − c2 > k3 , the hotel adopts the OTA models (the merchant model or the agent model);
(2) when c1 − c2 < k4 , the hotel adopts the direct booking model;

C 2017 The Authors.
(3) when k4 < c1 − c2 < k3 and c2 < c2 , the hotel adopts the direct booking model; otherwise, the
hotel cooperates with the OTA in agent model.
N N
Remark 5. k3 = c0 + λ1 ln N1 e, k4 = c0 + λ1 ln N (1−β
1
)
, and k3 > k4 because 1 − β > 1e .
2 2
Finally, we analyze the influence of hotel capacity on hotel’s decision as follows.

cost c2 , bargaining power of OTA β, and hotel capacity K, are as follows:
c2 (K, c2 ), β Hotel’s channel strategies

N1
− λ1 ln N2
− 1
λ
− c0 + c1 − c2 < 0 f3 (c2 , K, β ) > 0 direct booking model
f3 (c2 , K, β ) < 0 agent model
N1
− λ1 ln N2
− 1
λ
− c0 + c1 − c2 > 0 1−β < 1
e
merchant model
f4 (c2 , K, β ) > 0 agent model
f4 (c2 , K, β ) < 0 merchant model
Remark 6. Function f3 (c2 , K, β ) = 0 is used to describe the relation between c2 and K when the
hotel’s profit in direct booking model and that in agent model are equal, which is described as a
piecewise function
⎧
N e−λ(c1 + λ )
1
⎪
⎪ 1 K
N1 e−λ( λ +c1 ) < K < N2 e−λ( λ +c0 +c2 )
1 1
⎨c2 + ln + co + 1 = 0,
λ N2 λK (1 − β )
⎪
⎪ 1 N1 1 N1
K > N2 e−λ( λ +c0 +c2 ) and −
1
⎩c2 + ln + c0 − c1 = 0, ln − c0 + c1 − c2 > 0.
λ N2 (1 − β ) λ N2
Function f4 (c2 , K, β ) = 0 is used to describe the relation between c2 and K when the
hotel’s profit in merchant model and agent model are equal, which is described as
K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )] − N2 e−λ(co+c2 + λ ) λ1 = 0, N2 e−λ( λ +c0 +c2 ) < K < N2 e−λ( λ +c0 +c2 ) .
2 2 1
2
Note that c2 increases in K and decreases in β in the function: f3 (c2 , K, β ) = 0, but decreases in K
and increases in β in the function: f4 (c2 , K, β ) = 0.
Proposition 3 suggests that when c2 is high, the hotel adopts the direct booking model, which
is obvious. When c2 is not too high, the agent model outperforms the other two models if hotel
capacity and bargaining power are big enough.
Case IV: Optimal strategy for OTA
From the OTA’s perspective, we evaluate the OTA’s profits in the OTA merchant model and OTA
agent model. The following result is obtained.
Proposition 4. For the OTA, the optimal choice is always the agent model while cooperating with the
hotel.
The reason is intuitive. The OTA plays a dominant role in the OTA agent model, while the hotel is
the leader in the OTA merchant model. The results show that divergence exists between the choices
of the hotel and the OTA. Specifically, the hotel prefers the OTA merchant model and the OTA
prefers the OTA agent model when 1 − β < 1e or 1 − β > 1e , N2 > N2 .

C 2017 The Authors.
4. Numerical examples
In this section, we present numerical examples to illustrate the theoretical results obtained by the
model analysis.
First, we conduct a numerical study to examine the effects of the size of customer population of
the OTA channel (N2 ) on hotel’s optimal decision. We use three different values for the bargaining
power of the OTA (β ∈ {0.5, 0.6, 0.8}), and two different values for hotel capacity (K ∈ {180, 220}).
Among them, the points marked out in Fig. 2 show the intersection of the two curves and the
turning point (because the curve comes from a piecewise function, the front part of which is a linear
function followed by a logarithmic function). For example, in Fig. 2b, points (3.26 × 104 , 36) and
(8.87 × 104 , 90) denote the turning points of the profit curves of the agent model and the merchant
model, respectively, and point (5.2 × 104 , 52.78) shows the intersection of these two curves. Note
that the intersection point and the turning point converge at (8.87 × 104 , 90) in Fig. 2a. Based on
the results, the hotel should choose the merchant model when the bargaining power of hotel is low
(1 − β < 1e ). As displayed in Fig. 2c, with β = 0.8, the profit in the merchant model is always higher
than that in the agent model. As shown in Fig. 2 (a, b and d), when the bargaining power of hotel
is close to the bargaining power of the OTA (1 − β = 0.5 or 0.4), the agent model outperforms the
merchant model when N2 is smaller than some critical value (Note that the bargaining power of
the OTA β is more than 0.5 in Assumption 1 because the OTA is the predominant actor in agent
model.) When hotel capacity K changes from 180 to 220, the critical value increases from 5.2 × 104
to 6.48 × 104 (Fig. 2b, d).
The relative difference between the customer population sizes of the direct booking channel and
the OTA channel (N1 and N2 ) also play a role on the optimal decision of the hotel, as shown
in Fig. 3. From the figure, it is found that when N1 is big enough compared with N2 , the hotel
adopts the direct booking model. The intersection point of equal-profit lines is increasing in hotel
capacity K. When hotel capacity K changes from 180 to 220, the intersection point changes from
(N2 , N1 ) ∼ (5 × 104 , 1.57 × 104 ) to (6.36 × 104 , 1.92 × 104 ), and the space for the agent model is
increasing in K. When N2 is high compared to N1 (k1 = 3.05, k2 = 3.32), the hotel should not
choose the direct booking model (Fig. 3a and b). It should be noted that the break-even line in the
chart is a curve rather than a straight line.
The impact of hotel capacity and cost on hotel’s optimal decision is evaluated and shown in
Fig. 4. The case of c2 > c1 is incompatible with practice and ignored. From Fig. 4, it is found that
when c1 is low enough compared with c2 , the hotel prefers the direct booking model, and prefers
cooperating with the OTA otherwise. When hotel capacity changes from 180 to 220, the intersection
changes from (c2 , c1 ) ∼ (0.43, 1.78) to (0.33, 1.68) (Fig. 4), and the space for the agent model is
increasing in K. When the difference between c1 and c2 is relatively high (k3 = 1.31, k4 = 1.35),
the hotel should not choose the direct booking model (Fig. 4a and b).
Figure 5 shows the impact of varying values of c2 and K on the optimal decision of the hotel
with other parameters given. As shown in the figure, the hotel will choose the direct booking model
if c2 > 0.75 and this decision has nothing to do with K. When 0.65 < c2 < 0.75, K > 85, the hotel
will choose the agent model, because the cost is moderate and sales quantity in the agent model is
relatively considerable. When c2 < 0.65, hotel’s decision changes from the merchant model to the
agent model as K increases.

C 2017 The Authors.
Fig. 2. The influence of N2 in the hotel’s optimal decision.

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Fig. 3. The influence of N1 and N2 in hotel decision.
Fig. 4. The influence of c1 and c2 in hotel decision.
Fig. 5. The influence of K and c2 in hotel decision.

C 2017 The Authors.
5. Extension
5.1. Discussion on linear demand function
In the previous analysis, exponential demand function is assumed. Nonetheless, it is interesting to

study the model with linear demand function, which is also commonly adopted in the literature.
We assume the demand function in the direct booking channel to be N1 (1 − p) and that in the
OTA channel to be N2 (1 − p). The decision making process and decision variables remain the same
as described in previous sections. Table 3 summarizes the optimal price, unit profit, and profit for
the three models with linear demand function.
Through the model analysis, we find that the linear demand form does not affect the assumptions
or the analysis process with the established models discussed in Section 3. The same optimal
decisions of the hotel and the OTA are derived in a similar fashion.
5.2. Discussion on dual channel model
We further discuss the dual channel case where the hotel relies on both direct channel and OTA.
Specifically, we consider the “direct booking + OTA agent” model. We assume that it is a Stackelberg
game where the OTA decides the commission rate first, followed by the hotel who adopts the price.
The price in the direct booking channel and the agent channel is assumed to be consistent, which
is a common practice for most dual-channel companies (Ernst & Young, 2001). The OTA’s profit
and hotel’s profit can then be calculated as
πO = N2 e−λp (φ p − c0 ); πH = N1 e−λp (p − c1 ) + N2 e−λp ((1 − φ)p − c2 )

. (24)
s.t. (N1 + N2 )e−λp ≤ K
Proposition 5. For the dual channel model, the optimal pricing strategy exists and is unique.
The analytical solution cannot be obtained due to the complexity of the model. Nonetheless, a
numerical example is conducted to compare the results with the single channel models established
earlier, i.e., the direct booking channel, OTA agent model, and OTA merchant model.
Figure 6 shows the impact of N1 and N2 on the optimal decision of the hotel with other parameters
given. With N1 = 14,000 and varying N2 between 10,000 to 100,000, we have the following:
(1) When N2 ≤ 30,000, the hotel prefers the dual channel model than the single channel models.
This is because that when customer quantity is relatively small, the hotel capacity can satisfy all
customers. The profit from two channels is bigger than that from one channel.
(2) When 30,000 < N2 ≤ 44,000, the hotel adopts the direct booking model. With increase in N2 ,
the limited hotel capacity cannot meet all customers. The profit of the hotel in the dual channel
model is decreasing in N2 . The hotel has to distribute a certain number of rooms to the OTA.
On the other hand, as described in Fig. 3, N1 is big enough compared with N2 , so the hotel
should adopt the direct booking model.
(3) When N2 > 44,000, the hotel opts to fully rely on the OTA (in merchant model or agent model).

C 2017 The Authors.

986
C 2017 The Authors.

Table 3
Optimal price, unit profit, and profit in three models with linear demand function
Merchant model
Condition Price Wholesale price Sales Hotel’s unit profit OTA’s unit profit Hotel’s profit OTA’s profit
1−c −c 3+c0 +c2 1−c0 +c2 1−c0 −c2 1−c0 −c2 1−c0 −c2 (1−c −c
0 2
)2 (1−c0 −c2 )2
N2 ( 04 2 ) ≤ K 4 2
N2 ( 4
) 2 4
N2 8
N2 16
1−c −c K 2K K2
N2 ( 04 2 ) > K 1 − NK 1 − 2K − c0 K 1 − 2K − c0 − c2 K (1 − N − c0 − c2 )
2
N2 N2 N2 2
N2

Agent model
Condition Price Commission Sales Hotel’s unit OTA’s unit Hotel’s profit OTA’s profit
rate profit profit
1−c0 −c2 1+c0 +c2 β+(2−β )c0 −βc2 1−c0 −c2 1−c0 −c2 (1−c0 −c2 )2 (1−β ) (1−c0 −c2 )2 β
N2 ( 2
)≤K 2 1+c0 +c2
N2 ( 2
) (1 − β( 2
) N2 4
N2 4
1−c −c
β )( 20 2 )
1−c0 −c2 K βc2 −(1−β )c0 K
N2 ( 2
)>K 1− N2
β− K (1 − β )(1 − β(1 − NK − K (1 − β )(1 − Kβ(1 − −
2
1− NK N2
2 K K
N
− c0 − c2 ) c0 − c2 ) N
− c0 − c2 ) c0 − c2 )
2 2
Direct booking model

Condition Price Sales Hotel’s unit profit Hotel’s profit
1−c 1+c1 1−c1 1−c1 (1−c )2
F. Ye et al. / Intl. Trans. in Op. Res. 26 (2019) 968–998
N1 ( 2 1 ) ≤ K 2
N1 ( 2
) 2
N1 4 1
1−c K K
N1 ( 2 1 ) > K 1− N1
K 1− N1
− c1 K (1 − NK − c1 )
1

Fig. 6. The influence of N2 in hotel decision.
Figure 7 shows the impact of c1 and c2 on the optimal decision of the hotel given other parameters.
We use c1 = 2 and vary c2 between 0.1 to 2. As shown in Fig. 7, we have the following:
(1) When c2 ≤ 0.3, the hotel prefers the dual channel model than the single channel models. In this
case, the cost for the hotel to add additional OTA channel is minimum.
(2) When 0.3 < c2 ≤ 1.05, the hotel prefers to rely on the OTA. This is because the price in the dual
channel model increases in the cost c2 , which decreases the sales volume and total profit. On
the other hand, as shown in Fig. 4, c2 is small enough compared with c1 , so the hotel adopts
merchant model or agent model.
(3) When c2 > 1.05, the hotel prefers the direct booking model.
6. Conclusion
We studied the optimal online channel strategies for hotels and compared three models, namely,
the direct booking model, the OTA agent model, and the OTA merchant model. We analyzed the
models both analytically and numerically.
The rationale for the direct booking channel is mainly affected by the size of customer population
of the official website (N1 ) and the cost for constructing and operating its official website for direct
booking (c1 ). The hotel should adopt the direct booking model if N1 is relatively big and c1 is
relatively small. Otherwise, the hotel should cooperate with an OTA.
If the hotel’s negotiation power is low, the hotel prefers the merchant model to the agent model
for cooperating with the OTA. If the hotel’s bargaining power is high, the customer population size
and the cost of the OTA are critical for the hotel to choose between the merchant model and the

C 2017 The Authors.
Fig. 7. The influence of c2 in hotel decision.
agent model. In this case, the agent model is preferred when the customer population size of the
OTA is relatively low and the unit cost of the OTA is relatively high, which leads to small sales
quantity.
We further discuss the situation where a hotel uses both direct booking and OTA channels.
Although analytical solution cannot be obtained due to the complexity of the dual-channel model,
some useful insights have been obtained through a numerical study. The results show that when the
customer population size of the OTA and the unit cost of the hotel in cooperating with OTA are
relatively small, the hotel should adopt the dual channel model.
There are some limitations to this work. In particular, the population size of the direct booking
channel via official website is usually increasing in time and capital investment, which is not consid-
ered in the established models. Other simplifying assumptions, made to ensure model tractability,
may also be relaxed in future study.
Acknowledgment
This work was supported by the Natural Science Foundation of China (71172075, 71471066,
71271089) and the Program for New Century Excellent Talents in University (NCET-13-0219).
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Appendix
Proof of Lemma 1
We separate N2 into three regions:
(a) 0 < N2 < Keλ( λ +c0 +c2 ) ; (b) Keλ( λ +c0 +c2 ) < N2 < Keλ( λ +c0 +c2 ) ; (c) N2 > Keλ( λ +c0 +c2 ) .
1 1 2 2
In the case of (a), the profit of hotel in merchant model and agent model are (see
2
∗ N e−λ(co +c2 + λ ) ∗ ∗
; πHN = N2 e−λ( λ +c0 +c2 ) 1−β
1
Table 2): πHM = 2 λ λ
. Obviously, we have: if 1 − β < 1e , πHM >
∗ ∗ ∗
πHN ; if 1 − β > 1e , πHM < πHN .
In the case of (b), the profit of hotel in merchant model and agent model are (see
2
∗ N2 e−λ(co +c2 + λ ) ∗ ∗
Table 2): πHM = λ
; πHN = K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )]. Because πHN is increas-
2
∗ ∗
ing in K for πHN (K ) = (1 − β )((− λ1 ) ln( NK ) − c0 − c2 − λ1 ) > 0, the maximum of πHN (πHN∗ ) is
2
N2 e−λ( λ +c0 +c2 ) 1−β when K is equal to N2 e−λ(co +c2 + λ ) . According to the result in the case of (a), we
1 1
λ
∗ ∗ ∗ ∗
have: if 1 − β < e , πHM > πHN ; if 1 − β > 1e , πHM < πHN .
1

C 2017 The Authors.
∗
The first and second derivatives of πHN with respect to N2 are
∗
∂πHN K (1 − β ) 1
= , (A1)
∂N2 λ N2
∗
∂ 2 πHN K (1 − β ) 1
=− < 0. (A2)
∂N2 2 λ N2 2
∗ ∗
Therefore, πHN is increasing in N2 and a concave function while πHM is linear function of N2 .
∗ ) ∗
When N2 is the maximum N2 = Keλ( λ +c0 +c2 ) , we have πHN = N2 e−λ(co+c2 + λ ) 2(1−β
2 2
λ
. Hence, πHM >
∗
πHN due to Assumption 1 (1 − β < 12 ). When N2 is the minimum N2 = Keλ( λ +c0 +c2 ) , we have
1
πHN = N2 e−λ(co +c2 + λ ) (1−β )

∗ 1 ∗ ∗
λ
. Hence, πHM < πHN because 1 − β > 1e . Therefore, there is one and only
∗ ∗
one intersection point for πHM and πHN in the case of (b).
In the case of (c), the profit of hotel in merchant model and agent model are (see Table 2):

M∗ −1 K 1 N∗ 1 K
πH = K ln − − c0 − c2 ; πH = K (1 − β ) − ln − c0 − c2 .
λ N2 λ λ N2
∗
The first order condition of πHM is
∗
∂πHM K 1
= > 0. (A3)
∂N2 λ N2
∗
The first order condition of πHN is
∗
∂πHN K (1 − β ) 1
= > 0. (A4)
∂N2 λ N2
∗ ∗
Then, when N2 is the minimum N2 = Keλ( λ +c0 +c2 ) , πHM and πHN are both minimum in the case
2
∗ ∗
of (c) and πHM (N2 = Keλ( λ +c0 +c2 ) ) > πHN (N2 = Keλ( λ +c0 +c2 ) ). Moreover, through function A3 and
2 2
A4, we find that the rate of increase is lager in merchant model than that in agent model. Hence,
∗ ∗
πHM > πHN .
Proof of Remark 1
∗ ∗
Up to now, we have proofed that the curves of πHM and πHN will intersect in one point. In the
following, we construct implicit function F (K, N2 )

1 K 2 1
F (K, N2 ) = K (1 − β ) − ln − c0 − c2 − N2 e−λ(co+c2 + λ ) (A5)
λ N2 λ

C 2017 The Authors.
The first derivatives of F (K, N2 ) with respect to K and N2 are

−1 K 1
FK (K, N2 ) = (1 − β ) ln − − co − c2 > 0 (A6)
λ N2 λ
e−λ(co+c2 + λ )
2
K (1 − β ) 1
FN2 (K, N2 ) = − (A7)
λ N2 λ
Through function (A.7), there exists a marginal value N20 = K (1 − β )e−λ(co+c2 + λ ) , if N2 > N20 ,
2
dN F (K,N ) dN
FN2 (K, N2 ) > 0; if N2 < N20 , FN2 (K, N2 ) < 0. Due to dK2 = − F K (K,N2 ) , we have: if N2 > N20 , dK2 > 0;
N2 2
if N2 < N20 , dK2 < 0. In addition, when N2 = N20 , πHM = K (1−β )

dN ∗ ∗ ∗
λ
, obviously, πHM < πHN . In other
words, there is no intersection point in the region [Keλ( λ +c0 +c2 ) , N20 ] if Keλ( λ +c0 +c2 ) < N20 . Therefore,
1 1
N2 is increasing in hotel capacity K.
Proof of Lemma 2
We split the two-dimensional space (horizontal and vertical are K and c2 respectively) into six
regions:
N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) , 0 < K < N2 e−λ( λ +c0 +c2 )
1 2 2
(a)
N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) , N2 e−λ( λ +c0 +c2 ) < K < N1 e−λ( λ +c1 )
1 2 2 1
(b)
N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) , K > N1 e−λ( λ +c1 )
1 2 1
(c)
N1 e−λ( λ +c1 ) < N2 e−λ( λ +c0 +c2 ) , 0 < K < N1 e−λ( λ +c1 )
1 2 1
(d)
N1 e−λ( λ +c1 ) < N2 e−λ( λ +c0 +c2 ) , N1 e−λ( λ +c1 ) < K < N2 e−λ( λ +c0 +c2 )
1 2 1 2
(e)
N1 e−λ( λ +c1 ) < N2 e−λ( λ +c0 +c2 ) , K > N2 e−λ( λ +c0 +c2 ) ,
1 2 2
(f)
We present the proof of (a)–(c) in details and omit the proof of (d)–(f), since the proof of (d)–(f)
follows a similar sequence of arguments.
In the case of (a), the profit of hotel in merchant model and direct booking model are (see Table 2):

∗ 1 K 1 ∗ 1 K
πHM = K − ln − − c0 − c2 ; πHD = K − ln − c1 .
λ N2 λ λ N1
We have

∗ ∗ 1 N1 1
πHM − πHD =K − ln − − co − c2 + c1 . (A8)
λ N2 λ
∗ ∗
Because N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) , we see that function A8 is negative, and then πHM < πHD .
1 2
In the case of (b), the profit of hotel in merchant model and direct booking model are (see Table 2):
2
∗ N2 e−λ(co +c2 + λ ) ∗
= K ((− λ1 ) ln( NK ) − c1 ). When K is the minimum K = N2 e−λ( λ +c0 +c2 ) , we
2
πHM = λ
; πHD
1

C 2017 The Authors.
∗ ∗ ∗ ∗
have πHM < πHD . In addition, πHD is increasing in K for πHD (K ) = (− λ1 ) ln( NK ) − c1 − 1
λ
> 0. There-
2
∗ ∗
fore, in this case, πHM < πHD .
In the case of (c), the profit of hotel in merchant model and direct booking model are (see Table 2):
2 1
∗ N2 e−λ(co +c2 + λ ) ∗ N1 e−λ(c1 + λ ) ∗ ∗
. We have πHM < πHD , because N1 e−λ( λ +c1 ) > N2 e−λ( λ +c0 +c2 ) .
1 2
πHM = λ
; πHD = λ
Proof of Proposition 1
We just need to prove the case of 1 − β > 1e and N2 < N2 , and compare the optimal profit of hotel
in direct booking model and agent model. First, we split the two-dimensional space (horizontal and
vertical are N2 and N1 respectively) into four regions:
N1 > Keλ( λ +c1 ) , 0 < N2 < Keλ( λ +c0 +c2 )

1 1
(a)
N1 > Keλ( λ +c1 ) , Keλ( λ +c0 +c2 ) < N2 < N2
1 1
(b)
0 < N1 < Keλ( λ +c1 ) , 0 < N2 < Keλ( λ +c0 +c2 )
1 1
(c)
0 < N1 < Keλ( λ +c1 ) , Keλ( λ +c0 +c2 ) < N2 < N2
1 1
(d)
In the case of (a), the profit of hotel in agent model and direct booking model are (see Table 2):

N∗ −λ( λ1 +c0 +c2 ) 1 − β D∗ 1 K
πH = N2 e ; πH = K − ln − c1 .
λ λ N1
∗ ∗
Because πHN increases in N2 and when N2 is the maximum N2 = Keλ( λ +c0 +c2 ) , we have πHN =
1
1−β ∗ ∗ ∗
K λ < πHD . Hence, πHD > πHN in this case.
In the case of (b), the profit of hotel in agent model and direct booking model are (see Table 2):
∗ ∗ ∗
πHN = K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )]; πHD = K (ln( NK )( −1
λ
) − c1 ). Because πHN increases in N2
2 1
) ∗ ∗
and when N2 is the maximum N2 = Keλ( λ +c0 +c2 ) , we have πHN = K 2(1−β
1
λ
< πHD for 1 − β < 12 . So,
D∗ N∗
in this case πH > πH .
In the case of (c), the profit of hotel in agent model and direct booking model are (see Table 2):
1
∗ ∗ N e−λ(c1 + λ )
πHN = N2 e−λ( λ +c0 +c2 ) 1−β
1
λ
; πHD = 1 λ . Because the sale quantity is uncertain in both models.
∗ ∗
We assume πH = πH and have a curve
D N
N1 = eλc1 N2 e−λ(c0 +c2 ) (1 − β ). (A9)
In the case of (d), the profit of hotel in agent model and direct booking model are (see Table 2):
1
∗ ∗ N1 e−λ(c1 + λ )
πHN = K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )]; πHD = λ
. We also fail to get the comparing result
2
∗ ∗
and assume πHD = πHN , then we have a curve

1
( λ+c1 ) 1 K
N1 = e λ λK (1 − β ) − ln − c0 − c2 (A10)
λ N2
Function (A9) and (A10) compose f1 (N1 , N2 , K ) = 0 appearing in Proposition 2. Obviously, N1 is
increasing in N2 and K.

C 2017 The Authors.
Fig. A1. The figure describes the nine regions in Proposition 3.
First, we split the two-dimensional space (horizontal and vertical are K and c2 , respectively) into
nine regions which is depicted in Fig. A1.
Because of the result in Lemma 2, we only need to compare the optimal profit of hotel in merchant
model and agent model with c2 < c∗2 and if c2 > c∗2 , we only need to compare the optimal profit of
hotel in direct booking model and agent model.
The first step: c2 > c∗2
Obviously, through Fig. 6 we find that when c2 > c∗∗ −λ( λ1 +c0 +c2 )
< N1 e−λ(c1 + λ ) ;
1
2 , there is N2 e
otherwise, N2 e−λ( λ +c0 +c2 ) > N1 e−λ(c1 + λ ) .
1 1
In the case of (a), the profit of hotel in agent model and direct booking model are (see Table 2):

∗ 1 K ∗ 1 K
πHN = K (1 − β ) − ln − c0 − c2 ; πHD = K − ln − c1 .
λ N2 λ N1
∗ ∗ ∗
Because when K is the maximum N2 e−λ( λ +c0 +c2 ) , we have πHN = K 1−β
1
λ
< πHD and πHN is increasing
N∗ D∗
in K. Therefore, in this case, πH < πH .
In the case of (b), the profit of hotel in Nash model and direct booking model are (see Ta-
∗ ∗
ble 2): πHN = N2 e−λ( λ +c0 +c2 ) 1−β
1
λ
; πHD = K ((− λ1 ) ln( NK ) − c1 ). Because when K is the minimum
1
∗ N ∗
N2 e−λ( λ +c0 +c2 ) , we have πHD = N2 e−λ( λ +c0 +c2 ) ((− λ1 ) ln( N2 ) − c1 + co + c2 ), which is bigger than πHN
1 1
1
∗ ∗ ∗
and πHD is increasing in K. Therefore, in this case, πHN < πHD .
In the case of (c), the profit of hotel in agent model and direct booking model are (see Table 2):
1
∗ ∗ N e−λ(c1 + λ ) ∗ ∗
πHN = N2 e−λ( λ +c0 +c2 ) 1−β
1
λ
; πHD = 1 λ . We can see that πHN < πHD .
In the case of (d), the profit of hotel in agent model and direct booking model are (see Table 2):

N∗ 1 K D∗ 1 K
πH = K (1 − β ) − ln − c0 − c2 ; πH = K − ln − c1
λ N2 λ N1

C 2017 The Authors.
∗ ∗
First, K < N1 e−λ( λ +c1 ) < N2 e−λ( λ +c0 +c2 ) in this case and πHN is increasing in K. There is πHN =
1 1
(1−β ) ∗ ∗ ∗
K λ < πHD when K = N2 e−λ( λ +c0 +c2 ) , so πHN < πHD .
1
In the case of (e), the profit of hotel in agent model and direct booking model are (see Table 2):

N1 e−λ(c1 + λ )
1
N∗ 1 K D∗
πH = K (1 − β ) − ln − c0 − c2 ; πH = .
λ N2 λ
∗ ∗
Although we fail to get the comparing results, there is a curve that makes πHN = πHD .

N e−λ(c1 + λ )
1
−1 K
c2 = ln − co − 1 (A11)
λ N2 λK (1 − β )
In the case of (f), the profit of hotel in agent model and direct booking model are (see Table 2):
N e−λ(c1 + λ )
1
∗ 1 − β D∗
πHN = N2 e−λ( λ +c0 +c2 )
1
; πH = 1 .
λ λ
Obviously, the comparing results have nothing to do with the hotel capacity K. There is a value c02
∗ ∗
that makes πHN = πHD :

1 N1
c02 = − ln − c0 + c1 (A12)
λ N2 (1 − β )
∗ ∗ ∗ ∗
If c2 < c02 , we have πHN > πHD ; if c2 > c02 , we have πHN < πHD . Function (A11) and (A12) compose
f3 (c2 , K, β ) = 0. Obviously, c2 is increasing in K and decreasing in β.
The second step: c2 < c∗2
In the case of (g), the profit of hotel in agent model and merchant model are (see Table 2):
∗ ∗
πHN = K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )]; πHM = K ((− λ1 ) ln( NK ) − λ1 − co − c2 )
2 2
∗ ∗
According to the conclusion in Lemma 1(c), we can see that πHN < πHM .
∗
In the case of (h), the profit of hotel in agent model and merchant model are (see Table 2): πHN =
2
∗ N2 e−λ(c0 +c2 + λ )
K[(1 − β )((− λ1 ) ln( NK ) − c0 − c2 )]; πHM = λ
. According to the conclusion in Lemma
2
∗ ∗ ∗ ∗
1(2), if 1 − β < 1
e
, πHN < πHM ; if 1 − β > 1
e
, there is a curve that makes πHN = πHM :

1 K 2 1
F (K, c2 ) = K (1 − β ) − ln − c0 − c2 − N2 e−λ(co+c2 + λ ) = 0. (A13)
λ N2 λ
The first derivatives of F (K, c2 ) with respect to K and c2 are

1 K 1
FK (K, c2 ) = (1 − β ) − ln − − co − c2 > 0 (A14)
λ N2 λ

C 2017 The Authors.
Fig. A2. The figure illustrates the possibilities discussed in Proposition 2.
Fc2 (K, c2 ) = −K (1 − β ) + N2 e−λ(co +c2 + λ ) .

2
(A15)
2
N2 e−λ(co +c2 + λ )
Then, there is a marginal value, K0 : K0 = 1−β
, if K > K0 , Fc2 (K, c2 ) < 0; if K < K0 ,
dc2 F (K,N ) dc2 dc2
Fc2 (K, c2 ) > 0. Due to dK
= − FK (K,c 2) , we have if K > K0 , dK
> 0; if K < K0 , dK
< 0. When
c 2 2
∗ ∗
K = K0 , πHN > πHM . Therefore, c2 is decreasing in K, and increasing in β (through resemble method).
Function (A13) is f4 (c2 , K, β ) = 0.
In the case of (i), the profit of hotel in agent model and merchant model are (see Table 2):
2
∗ ∗ N e−λ(c0 +c2 + λ )
πHN = N2 e−λ( λ +c0 +c2 ) 1−β
1
λ
; πHM = 2 λ
∗ ∗
According to the conclusion in Lemma 1(c), we have: if 1 − β < 1e , πHN < πHM ; if 1 − β > 1e ,
∗ ∗
πHN > πHM .
Because of the result in Lemma 2, we only need to compare the optimal profit of hotel in merchant
N N
model and agent model with − λ1 ln N1 − λ1 − c0 + c1 − c2 > 0 and if − λ1 ln N1 − λ1 − c0 + c1 − c2 <
2 2
0, we only need to compare the optimal profit of hotel in direct booking model and agent
N
model. We omit the proof in the case of − λ1 ln N1 − λ1 − c0 + c1 − c2 > 0 because the proof is
2
the same as Lemma 1. First, we split the two-dimensional space (horizontal and vertical are
N
c1 and c2 respectively) into four regions if − λ1 ln N1 − λ1 − c0 + c1 − c2 < 0, which is depicted in
2
Fig. A2.
The classification and proof of (a), (b), (c) and (d) are the same as Proposition 3. In addition,
function (A11) and (A12) compose function f2 (c1 , c2 , K ) = 0.

C 2017 The Authors.
We separate N2 into three regions:

(a) 0 < N2 < Keλ( λ +c0 +c2 ) ; (b) Keλ( λ +c0 +c2 ) < N2 < Keλ( λ +c0 +c2 ) ; (c) N2 > Keλ( λ +c0 +c2 ) .
1 1 2 2
In the case of (a), the profits of hotel in merchant model and agent model are (see Table 2):
1 ∗ 1
N2 e−λ(co+c2 + λ ) ; πoN = N2 e−λ( λ +c0 +c2 ) β,
2 1
πoM ∗ =
λ λ
∗
respectively. Obviously, we have πOM ∗ < πON because β > 12 .
In the case of (b), the profits of hotel in merchant model and agent model are (see Table 2):
M∗ ∗ ∗
πO = λ1 N2 e−λ(co+c2 + λ ) ; πON = K ((− λ1 ) ln( NK ) − c0 − c2 )β, respectively. Because πON is increasing
2
2
∗
in K for πHN (K ) = β((− λ1 ) ln( NK ) − c0 − c2 − λ1 ) > 0. When K is the minimum K = N2 e−λ( λ +c0 +c2 ) ,
2
2
∗ ∗
we have πOM < πON .
∗
In the case of (c), the profits of hotel in merchant model and agent model are (see Table 2): πOM =
∗
∗ ∗ ∂πON
1
λ
K; πON = K ((− λ1 ) ln( NK ) − c0 − c2 )β, respectively. The first order condition of πON is ∂N2
=
2
∗ ∗
Kβ 1 λ( λ2 +c0 +c2 )
λ N2
> 0. When N 2 is the minimum N2 = Ke , we have πOM < πON .
The profit of hotel is
πH = N1 e−λp (p − c1 ) + N2 e−λp ((1 − φ)p − c2 ) (A16)
The profit of OTA is
πO = N2 e−λp (φ p − c0 ) (A17)
The first and second derivatives of πH with respect to p are
∂πH
= e−λp[N1 (1 − λp + λc1 ) + N2 (1 − φ − λp + λφ p + λc2 )] = 0 (A18)
∂p
∂ 2 πH
= e−λp (−λN1 − λN2 + λφN2 ) < 0 (A19)
∂ p2
N1 (1+λc1 )+N2 (1−φ+λc2 ) ∂p N2 (λp−1)

Hence, we obtain p = λ(N1 +(1−φ)N2 )
and ∂φ
= λ(N1 +(1−φ)N2 )
.

C 2017 The Authors.
N1 (1+λc1 )+N2 (1−φ+λc2 )
Substitute p = into OTA’s profit function, we have
λ(N1 +(1−φ)N2 )

∂πO −λp ∂p ∂p
= N2 e p+φ − λ(φ p − c0 )
∂φ ∂φ ∂φ
N2 e−λp
= [λ(N1 + (1 − φ)N2 )p + (λp − 1)N2 (φ − λ(φ p − c0 ))] = 0
λ(N1 + (1 − φ)N2 )
∂ 2 πO N2 e−λp
=
∂φ 2
λ(N1 + (1 − φ)N2 )
∂p ∂p
−λN2 p + λ(N1 + (1 − φ)N2 ) + λ N2 (φ − λ(φ p − c0 ))
∂φ
∂φ
∂p
+ (λp − 1)N2 1 − λp − λφ <0
∂φ
Hence, the OTA’s profit is concave of commission rate. Hence, the optimal price and commission
rate (p∗ , φ ∗ ) exists and is unique. It should be noted that the result ignores the hotel service capacity.
When (N1 + N2 )e−λp∗ > K, the hotel and OTA should adjust the price to optimal profit and
make (N1 + N2 )e−λp = K. Hence, the optimal price changes to − λ1 ln N K+N and the corresponding
1 2
N1 λ(N1 c1 +N2 c2 )
optimal commission rate is 1 + + N2 (1+ln N K
. Obviously, the commission is too big in this case,
+N )
N2
1 2
considering a large N2 . We set φ to a threshold of 0.8 or 0.95 when it is too big in the numerical
example.

C 2017 The Authors.

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INTERNATIONAL

Optimal online channel strategies for a hotel considering direct

F (p) = 1 − e−λp, (1)

Fig. 1. Three alternative ways for selling rooms online.

Variables and parameters Definition

2.1. Direct booking model

2.2. OTA merchant model (or merchant model)

πOM = N2 e−λp (p − w − c0 ); πHM = N2 e−λp (w − c2 )

πHM (w) = N2 e−λ( λ +c0 +w ) (w − c2 ).

πHM (w) = N2 e−λ( λ +c0 +w ) (1 − λ(w − c2 )) = 0,

More specifically, we obtain puM = λ1 + c0 + w = λ2 + c0 + c2 . It indicates that if all else being

2.3. OTA agent model (or agent model)

πON = N2 e−λp (φ p − c0 ); πHN = N2 e−λp ((1 − φ)p − c2 )

Then, we obtain the optimal commission rate φ through function (20):

International Transactions in Operational Research

Condition Price Sales Hotel’s unit profit Hotel’s profit

β N2 Hotel’s channel strategies

Case III: Comparison of three different models

β (N2 , N1 ) Hotel’s channel strategies

(c1 , c2 ) (c1 , c2 ), β Hotel’s channel strategies

Finally, we analyze the influence of hotel capacity on hotel’s decision as follows.

c2 (K, c2 ), β Hotel’s channel strategies

Fig. 2. The influence of N2 in the hotel’s optimal decision.

Fig. 3. The influence of N1 and N2 in hotel decision.

Fig. 4. The influence of c1 and c2 in hotel decision.

Fig. 5. The influence of K and c2 in hotel decision.

5.1. Discussion on linear demand function

In the previous analysis, exponential demand function is assumed. Nonetheless, it is interesting to

5.2. Discussion on dual channel model

πO = N2 e−λp (φ p − c0 ); πH = N1 e−λp (p − c1 ) + N2 e−λp ((1 − φ)p − c2 )

C 2017 The Authors.

International Transactions in Operational Research

Direct booking model

C 2017 International Federation of Operational Research Societies

Fig. 6. The influence of N2 in hotel decision.

Fig. 7. The influence of c2 in hotel decision.

We separate N2 into three regions:

πHN = N2 e−λ(co +c2 + λ ) (1−β )

if N2 < N20 , dK2 < 0. In addition, when N2 = N20 , πHM = K (1−β )

N2 is increasing in hotel capacity K.

N1 > Keλ( λ +c1 ) , 0 < N2 < Keλ( λ +c0 +c2 )

N1 = eλc1 N2 e−λ(c0 +c2 ) (1 − β ). (A9)

Fig. A1. The figure describes the nine regions in Proposition 3.

The first derivatives of F (K, c2 ) with respect to K and c2 are

Fig. A2. The figure illustrates the possibilities discussed in Proposition 2.

Fc2 (K, c2 ) = −K (1 − β ) + N2 e−λ(co +c2 + λ ) .

We separate N2 into three regions:

The profit of hotel is

πH = N1 e−λp (p − c1 ) + N2 e−λp ((1 − φ)p − c2 ) (A16)

The profit of OTA is

The first and second derivatives of πH with respect to p are

N1 (1+λc1 )+N2 (1−φ+λc2 ) ∂p N2 (λp−1)

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N2 is increasing in hotel capacity K.