In reply to Sam Mayfield:
Surely this is exactly the point of a deposit? If you book some kind of finite resource like a hotel room, then the deposit is there so that the customer has a bit of "skin in the game". Otherwise, you could just not turn up, and the hotellier, who might have turned people away because you said you were coming, might not be able to let out the room which would leave them out of pocket. The deposit is there to equalise the risk a bit for the hotellier. The level of risk is dependent on the time of cancelling, obviously just not turning up almost certainly leaves the hotellier out of pocket, whereas if you cancel a year in advance, then I'd expect the room could probably still be let out. Deposit return clauses are often written to reflect this (i.e. cancelling 6 months in advance, full return of deposit, 1 month in advance, 50% return, 2 weeks 25%, less than two weeks, no return).
Now, this would all depend on the actual contract signed, but I generally wouldn't expect to get the deposit back, although that's not to say that I wouldn't perhaps ask. I think a fair approach would be for you to refuse to return the deposit, but if you do manage to get a booking for that week, then you can return the deposit. Otherwise, that's exactly what it's there for! I think whether you choose to roll it over to another booking is up to you - it might make commercial sense for you to offer that if you think it might secure another booking, but I think that could be seen as a goodwill gesture. There's nothing wrong with you just upholding your side of the contract though! If they signed up for a non-returnable deposit, then that's their choice, and there are things such as travel insurance that they could use to claim their expenses back if they want to. If they haven't got any travel insurance, then that's again a risk they chose to take.
As a counter-example, there is a hotel I've stayed at a few times which specifically states that there is no deposit or advanced booking to pay, and that cancellation is "free" right up to the time of arrival. The first time I booked, I specifically chose it for that reason, and I've been back on at least two occasions since, so you could argue that their policy won my business. Whether it pays in the long term for them to offer that policy is something that they have to work out themselves.