The Impact of Pricing on Cancellations in the Hotel Industry

Abstract

Hotels that offer flexible cancellation terms often witness a high number of cancelled bookings. A common assumption in the hotel industry is that cancellations are driven by random and exogenous factors beyond customers' control. However, in transaction data obtained from a hotel partner, we find that the cancellation rate increases substantially with the booking price. This points to the possibility that the booking price can be an important driver for cancellations. To investigate this relationship, we employ a hazard model and find empirical support. Specifically, a $50 increase in the booking price results in a 16% increase in the hazard of a cancellation. This finding is robust to several alternative model specifications, different subsets of the data, and an alternative operationalization of the booking price. Combining the reservation data with price data from competing hotels nearby, we test for customers' continued price search after booking as a potential mechanism and show that it mediates 27% of the total effect of booking price on the hazard of a cancellation. Driven by this empirical evidence, we conduct a counterfactual analysis and find that the hotel may lose as much as 11% in revenue during high season for ignoring the impact of pricing on cancellation.

Keywords: cancellation, pricing, hotel revenue management, empirical analysis