AbstractIn addition to a hotel's direct sales channel, the hotel can choose whether to use the online travel agency (OTA) channel, and run a dual‐channel distribution system. For the hotel, selling rooms through OTA expands the available market, but comes at some expense, such as fewer allocated rooms for its own direct channel. In this paper, we formulate a theoretical game model to analyze the impact of various parameters on the channel and pricing decisions. We also compare the impact of form of contract, where the contract between hotel and OTA can be based on either the merchant or agency model. We show the impact of capacity on the hotel's channel choice. In the dual‐channel system, we find that the OTA prefers the agency model over the merchant model when the hotel's capacity is small. We also propose a revenue‐sharing contract that can achieve channel coordination for both hotel and OTA retailers under both models.