Kimpton Hotels Case

Sumit Kunnumkal
Indian School of Business

Price Degradation Cycle

Source: Jerath, Netessine, Veeraraghavan (2009)

Kimpton Hotels
Exihibit 2
sample historical bids on principle
BID ($)
BID ($)
BID ($)
BID ($)
BID ($)
BID ($)
BID ($)
176
162
252
155
184
164
176
140
198
140
149
176
176
132
202
114
246
176
176
154
123
189
220
176
184
211
162
198
220
114
164
176
140
167
123
132
176
132
163
114
220
145
153
133
132
148
154
149
220
164
154
210
220
114
242
154
189
202
176
193
236
117
118
154
154
140
146
149
118
123
123
242
140
134
114
176
180
154
132
196
154
132
230
162
127
242
180
132
176
167
149
166
132
118
140
132
127
123
167
132
140
140
136
132
154
123
145
132
158
242
140
140
167
159
145
115
149
176
220
176
180
132
127
176
220
154
139
211
114
123
233
140
175
123
127
132
171
176
180
190
211
252
145
118
127
198
220
162
132
155
167
215
132
132
167
140
140
132
114
156
176

Exhibit 3
Number of bids placed on principle
date
#bids placed
03/01/08
17
03/07/08
20
03/08/08
19
03/14/08
10
03/15/08
22
03/21/08
27
03/22/08
28
03/28/08
18
03/29/08
25
04/04/08
21
04/05/08
26
04/11/08
25
04/12/08
29
04/18/08
23
04/19/08
10
04/25/08
27
04/26/08
35
05/02/08
35
05/03/08
30
05/09/08
36
05/10/08
23
05/16/08
45

No. of bids

Bids placed
Source: Kimpton Hotels case

Kimpton Hotels
Random number of customers place bids (N)

Bid of each customer is a random variable (B)

Fitting Distributions to Data

@Risk has a distribution fitting tool

Bid values

No. of bids placed

Chi-square test
Suppose we have a random sample of size n
Hypothesis: The sample comes from a discrete
distribution with P(X=i) = pi for i=1, .., K
Chi-square test
Count the number of sample points taking the value i.
Call that Ni
Compute T = i (Ni n pi )2/ n pi
T is approximately a chi-square random variable with
K-1 degrees of freedom
Compute P( X2 K-1 t) where X2 K-1 is a chi-square
random variable with K-1 degrees of freedom and t is 6
the realized value of T

Chi-square test
Raw data on number of customer service
requests (per min) at a customer care center (
100 sample points (in EXCEL file) )
Hypothesis: The sample comes from a discrete
distribution with pmf
x

P(X=x)

0.10

0.15

0.25

0.10

0.40

The EXCEL function COUNTIF(.) is useful to construct the empirical frequency

distribution

Chi-square test
Raw data on number of customer service
requests (per min) at a customer care center (
100 sample points (in EXCEL file) )
Hypothesis: The sample comes from a discrete
uniform distribution on [0,4]. That is,
x

P(X=x)

0.20

0.20

0.20

0.20

0.20
8

Continuous data
Suppose we have the historical sales records at CoolCo
Hypothesis: The sample comes from a normal
distribution with a mean of 8,000 and standard deviation
of 1,500

Continuous data
Hypothesis: Sample comes from a distribution with cdf
F(.)
Kolmogorov-Smirnov Test
Obtain the empirical distribution function from the sample data
Compute the Kolmogorov-Smirnov test statistic
Compute the p-value for the data set: If d is the observed value
of the test statistic, the p-value is P(D d)
A small p-value indicates that the hypothesis is inconsistent with
the data

10

Kolmogorov-Smirnov Test
Hypothesis: Sample comes from a distribution with cdf
F(.)

11

Kolmogorov-Smirnov Test
Construct empirical distribution function

12

Kolmogorov-Smirnov Test
Compute the Kolmogorov-Smirnov test statistic

13

Kolmogorov-Smirnov Test
Compute the Kolmogorov-Smirnov test statistic

14

Kolmogorov-Smirnov Test
Compute the Kolmogorov-Smirnov test statistic

15

Continuous data
Hypothesis: Sample comes from a distribution with cdf
F(.)
Anderson-Darling Test
Obtain the empirical distribution function from the sample data
Compute the Anderson-Darling test statistic
Compute the p-value for the data set
A small p-value indicates that the hypothesis is inconsistent with
the data

@Risk (and other statistical analysis software) have the goodness of fit tests built in
16

Fitting Distributions to Data

@Risk has a distribution fitting tool
Poisson(27.28)

Triangular(113, 113, 260)

Bid values

No. of bids placed

Simulation Model
Fix the number of rooms released and the
posted price
Input random variables:
Number of bids, N ~Poisson
Bid values of the bidders: B1, B2, , BN ~Triangular

Output random variable:

Revenue

Decision variable : Posted price

Search over a range of posted prices to find the
revenue maximizing price

Expected Revenues

Multiple Posted Prices

Hotels able to post multiple prices on Priceline
The posted price closest to the bid (without
going over) was paid
For example, if Kimpton posts prices of $100 and
$80.
If a $120 bid came in, then the bid is accepted
(provided a room is available at that price) and
Kimpton gets $100
If a $90 bid came in, then the bid again is accepted
(provided a room is available at that price) and
Kimpton gets $80
20

10

Multiple Posted Prices

Assume Kimpton will only post two different
prices
What should the prices be?
How many rooms (out of the 10 rooms) should
be allocated at each price point?

21

Simulation Model
Fix the posted prices and the number of rooms
released at each price point (no more than 10 in total)
Input random variables:
Number of bids, N ~Poisson
Bid values of the bidders: B1, B2, , BN ~Triangular

Output random variable:

Revenue

Decision variables: Posted prices, number of room

released
Search over a range of posted prices and allocations
to find the revenue maximizing price

11

Simulation Results
P1

P2
140
190
130
260
160
170
230
250
250
260
250
220
150
240
230
250
190
150
170
150
150
160
170
180
180
190
200

N1
130
180
120
250
150
160
220
240
130
250
240
140
130
140
220
150
180
140
160
140
140
130
130
130
170
150
150

N2
10
5
10
0
7
5
2
2
9
4
1
9
0
9
9
1
0
8
6
9
10
7
10
10
0
5
5

0
5
0
10
3
5
8
8
1
6
9
1
10
1
1
9
10
2
4
1
0
3
0
0
10
5
5

Exp Revenue
1396.78
1201.064
1299.584
32.1
1436.798
1222.192
424.268
123.688
161
32.1
121.938
584.62
777.218
261.488
390.284
1370.49
343.008
1438.15
1365.682
1473.412
1482.24
1500.08
1504.602
1376.028
367.71
1598.6
1528.36

23

Simulation Results

Opt Soln (from RiskOptimizer): P1=180, P2=150, N1= 6, N2=4

24

12