ECONOMIC BENEFIT EVALUATION OF RESERVATION SYSTEMS

Abstract

In this paper, a reservation system is regarded as a mechanism, which allocates the services to potential customers along the first-comer-first-served principle. The economic benefits of a reservation system are classified into two distinct functions: 1) to supply the customers an option to purchase certainly the service in future; 2) to function as a revelation mechanism, which attaches the priority in trade to those who derive more satisfaction from the service than others. In this paper, a market equilibrium model is formulated to evaluate the economic benefits of the reservation system in a monopolistic service market. The paper shows that the consumers' welfare is worse off in the market equilibrium with the reservation system, while the social welfare can be always improved; in order to deter the degradation of consumers' welfare, the cancel fee systems should be regulated.