Decisions, Operations, and Technology Management

We study two reservation deposit policies for a service firm to increase its revenue through higher capacity utilization. First, under the "no deposit" policy, the firm requires no reservation deposit and imposes no "no show" penalty. Anticipating potential "no shows," a firm may overbook; hence, there is no guarantee that the reserved service will be provided under the no deposit policy. On the contrary, under the "guarantee deposit" policy, a guarantee deposit is required for each customer to make a non-cancelable reservation. To honor the reserved service under the guarantee deposit policy, the firm will not overbook. We analyze each deposit policy as a Stackelberg game in which the firm acts as the leader who selects the booking capacity under the no deposit policy (or the required deposit under the guarantee deposit policy), and each customer acts as the follower who decides whether to reserve or not. Our model incorporates rational customer behavior so that each customer will take other customers' behavior into consideration. Using the firm's optimal booking capacity (optimal required deposit) in equilibrium under the no deposit policy (the guarantee deposit policy), we compare the firm's expected profits under these two policies in a monopolistic environment. Our results suggest that the firm should charge a higher optimal retail price under the no deposit policy, and adopt the no deposit policy when the demand rate is below a certain threshold. By analyzing a game of duopolistic competition between two firms, we develop the conditions under which the firms will adopt a particular pair of deposit policies in equilibrium, and we show this game can lead to a Prisoner's Dilemma. Moreover, when both firms charge the same retail price, we show the existence of an equilibrium in which both firms adopt the no deposit policy.