In-Class Practice

In-class Practice

HOTEL PRICING The questions deal with pricing hotel rooms and evaluating the pricing performance. This exercise closely follows the one discussed in class regarding the demand uncertainty and limited capacity. You can use the spreadsheet that is posted on the course website to help you solve this problem. 1. The Fairmont Copley Plaza in Boston has 239 rooms. Copley offers an rL= $199 (low fare) discount fare targeting leisure travelers. Regular fare is rH= $269 (high fare) targeting business travelers. There is no shortage of demand for low fare rooms. However, the demand for high fare rooms is uncertain and depends on business conventions and conferences going on in town. From previous experience and hotel occupancy data, you have estimated that the business traveler demand follows a normal distribution with mean=40 and standard deviation=15. How many rooms should be protected for high fare travelers? What should a booking limit be for low fare reservations?

2. Suppose the manager of the hotel wants to figure out how the optimal protection level (for high demand travelers) varies with changes in price of the high fare (keeping the low fare constant). Fill in the blanks of the following table (reproduce your own table in Excel).

Distribution Number of rooms reserved for high Mean St. Dev. High Price Low Price Critical Ratio demand customers 40 15 209 199 40 15 219 199 40 15 229 199 40 15 239 199 40 15 249 199 40 15 259 199 40 15 269 199 40 15 279 199 40 15 289 199 40 15 299 199 40 15 309 199 40 15 319 199 40 15 329 199 40 15 339 199

3. Graph the relationship between high price (X axis) and Number of rooms reserved for high demand customers (Y axis). Intuitively explain why such relationship holds.

4. Now, instead of varying the high fare, manager wants to see how the optimal protection level changes with respect to the certainty of predicted demand (different levels of standard deviation). Fill in the blanks of the following table (reproduce your own table in Excel).

Distribution Number of rooms Mean St. Dev. High Price Low Price Critical Ratio reserved for high demand customers 40 5 269 199 40 7.5 269 199 40 10 269 199 40 12.5 269 199 40 15 269 199 40 17.5 269 199 40 20 269 199 40 22.5 269 199 40 25 269 199

5. Graph the relationship between Standard deviation (X axis) and Number of rooms reserved for high demand customers (Y axis). Intuitively explain why such relationship holds.