Revenue management

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Reference no: EM13110841

Le Meridien in San Francisco has 160 rooms. The hotel has an ample low fare demand at the room rate of $200 per night, but the demand from the high fare class, which pays $450 per night on average, is uncertain. The high fare demand is normally distributed with mean 60 and standard deviation 42 (assume this std.dev. is correct even though it is large).

a.How many rooms should Le Meridien protect for high fare customers to maximize expected revenue? (Leave your answer in decimal form, i.e., no need to round to an integer value.)

b. Suppose Le Meridien sets a booking limit of 100 for low fare customers. How many high fare customers does the hotel expect to turn away due to a lack of rooms?

c. When high-fare demand is less than their protection level, the Le Meridien assumes rooms go empty because it is too late to sell the rooms to low-fare arrivals. But now they have an opportunity to sell those rooms at the last-minute to a third party seller of opaque goods (such as hotwire.com and priceline.com). The third party seller buys the room inventory on the day at $80, and assumes all the risk of selling those rooms on its website. What critical ratio should the hotel use for setting the protection level for its high fare customer class (who continue to pay $450 per night, and whose demand is still normally distributed with mean 60 and standard deviation 42) knowing that it now has this opportunity to sell off remaining inventory at the last minute for $80? (Early demand at the low fare of $200 remains ample and Le Meridien still makes this decision to maximize expected revenue.)

d.Le Meridien partner, DreamOn Airlines is a startup that emphasizes low prices. They charge a single price for a seat on a flight and then customers must purchase %u201CDO bucks%u201D for %u201Camenities%u201D. For example, your first carry-on bag is 5 DO bucks, while your first check-in bag is 50 DO bucks. Remarkably, even use of the in-flight restroom requires 2 DO bucks. Consistent with this theme, DreamOn does not offer refunds on tickets. For example, if you miss your flight, then you need to purchase another ticket on another flight. Given that DreamOn does not offer refunds, should they overbook their flights? Choose the best answer.

i. No. Because they don%u2019t offer refunds, all customers who purchase tickets will show up for their flight.

ii. No. Because they charge extra for amenities, there is no need to overbook.

iii. No. Because their demand will be too low to justify overbooking.

iv. No. Because they have a single price for their seats, there is no need to do revenue management.

v. Yes. Because they have a single price for their seats, they need to maximize revenue.

vi. Yes. Even without a refund, there could be some empty seats that could be filled with overbooking.

vii. Yes. Because overbooking is necessary when a firm implements booking limits.

Reference no: EM13110841

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