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This paper aims to develop overbooking models to determine the optimal number of overbooking for hotels having one and two different types of rooms.

This paper presents mathematical modeling to find the optimal solutions of overbooking for stochastic cancellation.

The authors prove that for hotels with only one type of room, there exists a closed form solution to guarantee the optimal number of overbooking, depending on the cost of walking customers to other hotels, the cost of unsold rooms and cancellation distribution observed in the past. For hotels with two types of room, they prove the convexity structure and identify equations to seek the number of overbooking for low-price and high-price rooms. The authors also provide key comparative statics on how model parameters impact the optimal decisions under different scenarios.

Overbooking decision is one of important and complicated decision-makings, which is related directly to the yield of hotel revenue management. It is necessary for a hotel manager to observe cancellation pattern in the history to make a reliable decision. This paper presents a method that can help hotel manager make this decision in practice.

This paper is one of the first articles in the hotel industry that considers the marginal cost for each room unsold caused by no shows and the marginal cost for each walking guest in a comprehensive perspective.