A Dynamic Equilibrium Pricing Model: A Game Theoretic Approach to Modelling Conventions' Room Rates

Utilizing the theoretical framework of game theory, this study provides an economic model to describe the process of determining a convention's room rates. It provides a method to infer simultaneously the room rate and the number of rooms allocated at each price level. This approach exploits information both on consumers' utilities and expectations, and on the hotel's perceptions of its markets. Equilibria in pure strategies are derived for various combinations of the market segments' relative size, supply demand ratios, and levels of willingness to pay. The study extends the existing literature on price optimization in hotels by including the customers as active participants in this strategic behaviour framework. The model demonstrates that the effectiveness of price optimization depends on the validity of the assumptions one makes about the segments' characteristics. The model identifies the market conditions under which yield management (allocation of rooms to room rates) maximizes the hotel's revenue. It shows the importance of a credible commitment by the hotel to maintain high room rates as time draws closer to the date of stay and shows how discounts can be used effectively to segment the market.