Optimal pricing strategy for hotels when online travel agencies use customer cash backs: A game-theoretic approach

In an online travel market, online travel agencies (OTAs) are paid by hotels according to a unit commission fee and the number of reservations. To obtain high revenue from selling hotel rooms, some OTAs provide cash backs to attract online travelers to make hotel reservations via the OTA’s Website rather than via traditional channels, such as by calls or in person. This study investigates the optimal pricing decision of hotels for OTAs with the effect of cash back and aims to provide practical pricing directions for hotels. The optimal decisions of hotels and OTAs are analyzed by backward induction within a Stackelberg game. Results indicate that hotels can determine an optimal unit commission to obtain maximal revenue. OTAs can find the optimal cash back to encourage online customers to make reservations from their Websites. Furthermore, OTAs aim to expand their visit volume (potential number of online customers) according to the given unit commission fee by expressing a proper effort level. The findings also show the importance of establishing a deep collaboration in increasing the whole income for both hotels and OTAs.