Simultaneous Optimization of Capacity Decision and Pricing Policy of a Hotel in Stochastic Demand Environment

In the context of the hotel industry, one of the biggest and capital-intensive challenges a decision maker has is to decide on the capacity of the hotel. While taking this decision, the decision maker needs to take seasonality of demand into consideration. Also, the interplay between price and demand also play a major role on this decision. In this study, an effort is made to simultaneously identify the optimal capacity and pricing policy of a hotel in the presence of a stochastic demand environment. Differential calculus is used to identify the solution. Both capacity and price are considered as decision variables for the decision maker. To comply with reality, the seasonality in demand is incorporated in the form of bi-level demand. Numerical illustrations are also shown to explain the decision-making process. This study offers a starting point for an entrepreneur to decide both capacity and pricing for their upcoming hotel.