Exotic reservations—Low-price guarantees

The increase in the volume of internet online bookings has had a major impact on distribution channels in the hotel industry. The popularity of such services stems from the consumers’ desire to obtain the lowest rate within their desired market segment. One possible cure is to offer the best rate guarantee. We show that current rate guarantees are essentially worthless to consumers; and demonstrate how a hotel company can structure a best rate guarantee that would provide value to consumers. In addition, we show, using a well-established exotic option pricing formula, how to price this best rate guarantee so that consumers would be willing to pay for the option.