A reservation model for a single firm serving a market with strategic consumers

Abstract

This paper considers a firm's reservation policy when it faces uncertain demand that depends on the strategic consumers. The modelling approach used in the present paper extends our understanding of reservations at a service firm (i.e., restaurants) when strategic consumers have outside options and different search costs. Consumers, in this study, are strategic due to different search costs, which include travelling, calling and inconvenience costs. The outside option represents the utility the consumer gets if he or she forgoes visiting the firm before knowing whether or not the product will be available. The model assumes exogenous price for the product in an equilibrium model and characterises the optimal reservation price, which is the price to hold a reservation, for the firm. The study evaluates the optimal reservation policy depending on the heterogeneity conditions of the strategic consumers and presents results based on the indifference values for search costs.