A newsvendor approach to inventory and pricing decisions in NYOP channels

Abstract

In opaque selling certain characteristics of the product or service are hidden from the consumer until after purchase, transforming a differentiated good into somewhat of a commodity. Opaque selling has become popular in travel service pricing as it allows firms to sell their differentiated products at higher prices to regular brand loyal customers while simultaneously selling to non-loyal customers at discounted prices. At its simplest level, the process can be regarded as a Newsvendor problem where a supplier has to make both pricing and quantity allocation decisions for a perishable good or service. As the originator of opaque selling, Priceline.com provides unique data to sellers that allows them to better utilize their opaque selling mechanism. Recently Priceline has made some changes to their mechanism that have potential impacts on how firms set prices and control inventory within the channel. In this framework, the problem has the characteristics of Newsvendor problems with multiple price points. In this article, we develop optimal pricing and inventory policies for a seller releasing inventory to an opaque sales channel. Furthermore, we investigate the impacts of Priceline’s changes upon optimal prices and inventory allocation policies. The model is empirically illustrated using Priceline data for a 3.5 star hotel.