We define overbooking as a strategy whereby service providers accept and confirm more reservations than the capacity they allocate for providing the service. Thus, the overbooking strategy may result in service denial to some consumers if the number of actual show-ups at the time of service exceeds the allocated capacity. Overbooking should be considered an integral part of the advance booking strategy of service providers. In this chapter, we demonstrate how service providers can increase their profits by using overbooking. Thus, in this chapter, we relax Assumption 7.3, which so far has ruled out the use of the overbooking strategy.

From a practical point of view, the dynamic booking models analyzed in Chapter 7 can be modified to accommodate overbooking by letting the booking capacity K exceed the available capacity level during all booking periods. However, maintaining the same “artificially high” capacity level throughout the entire booking process need not be optimal because it may be more profitable to reduce the amount of overbooking as the reservation period gets closer to the service delivery time. In other words, it may be profitable to allow for a large overbooking level at the beginning of the booking process, but lower levels toward the end, when the service provider can more accurately estimate the final number of reservations made and the expected number of show-ups. Despite this discussion, in this chapter, we do not attempt to integrate overbooking with the dynamic booking models of Chapter 7. Instead, we develop an independent model for computing the profit-maximizing booking levels.