The Auction Approach to Airline Overbooking

Why do the airlines overbook?  Because people don’t show up!  Why don’t they show up?  Frequently, they have traffic or similar problems and get to the gate after the plane doors are closed.     Don’t the airlines make money from empty seats?  Not if they accommodate the passengers who were stuck in traffic on a later flight.

A few years ago I was in Amsterdam and went on a tour of the wholesale flower market near Schiphol airport.  Flowers are purchased by the Dutch auction mechanism.  Each lot of flowers is initially offered at a relatively high price and the auctioneer lowers the price until a buyer bids for it.   The first person to bid purchases the lot.

Could the airlines do a similar auction when overbooked?    They could start with a low price and keep raising it until someone agreed to leave their seat for the offered reward. In the flower auction, the goal of the buyer is get the lot for the lowest price.  But buyers who wait too long for the price to drop wind up with no flowers.    In the airline version, the passenger’s goal is to get the highest price for giving up the seat.   Like the Dutch auction, those who wait too long will find the seat is already sold before they act.

In the flower auction, there is one seller and many buyers.  In the seat auction there is one buyer and many sellers.   But in each case, the many must decide what value they put on the object on sale.

If any readers know the executive leadership at major airlines, please feel free to pass this along.


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