Would You Like to Upgrade to a Premium Room? Evaluating the Benefit of Offering Standby Upgrades

An important challenge faced by hotels is how to set their premium room price differential over their standard rooms and how to manage the upsell process. Standby upgrades, where the customer is only charged if the upgrade is available at the time of arrival, is one technique that has become increasingly popular in practice for monetizing the premium room inventory that may otherwise go unused. We develop a model of premium room and standby upgrade pricing under an uncertain market size and examine how and when standby upgrades can provide additional revenue for a hotel. When guests are myopic, we show that standby upgrades can be used as a powerful price discrimination tool, especially for hotel properties with high premium‐to‐standard room ratios. When guests are strategic, the benefit of standby upgrades is significantly diminished; we show that standby upgrades only increase revenue when the hotel property has a low premium‐to‐standard room ratio. Our findings thus provide guidance on the hotel types and environments that are most suitable for standby upgrades. The online appendix is available at https://doi.org/10.1287/msom.2016.0596.