Algorithmic Cancellation Optionality (ACO): Formulating an American Option-Pricing Framework for Lead-Time-Dependent Non-Refundable Rate Spreads in Hospitality Distribution

Hotels sell flexible rates that embed a free-cancellation right and non-refundable (NRF) rates that remove it in exchange for a discount, yet the discount is usually a static percentage set without reference to the value of the right being repurchased. This paper formulates Algorithmic Cancellation Optionality (ACO), which treats each flexible booking as an American-style option written by the hotel and exercisable until the free-cancellation cutoff, and prices the NRF spread as the hotel's repurchase price for that option. The writer's liability is derived in intensity-based form as the convolution of the guest's exercise density with a loss-given-exercise schedule that declines as resale time lengthens. Two propositions follow: option cost is hump-shaped in lead time whenever recovery of washed inventory improves with residual time, and the profit-maximising spread equals the option cost of the marginal switcher less an inverse semi-elasticity markdown.