Who hasn’t heard an airline gate attendant announce, “We are in an overbooked situation and are offering $xxx to anyone willing to give up a seat and take a later flight?”
The problem with this announcement for the airlines is that there is often a rush of people supplying seats — the $xxx is above equilibrium, and the airline is offering some volunteers a substantial consumer surplus.
Northwest Airlines has found a way to circumvent this: When you check in online, the website states that the flight is very full and they are accepting volunteers to give up seats. If you click “yes” to indicate your interest, it then ask how much money you want as compensation. It notes clearly that they will take the lowest offered prices first. If it needs 10 volunteers, Northwest could offer each the tenth-lowest price offered, reducing consumer surplus, and saving itself money compared to the gate announcement.
But why not go whole-hog: Give each of the volunteers exactly what she/he offered, thus entirely wiping out consumer surplus. I bet they do that.
This is a rare example of perfect price discrimination, and it wouldn’t have been possible without the internet.
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It would depend on how long I am likely to wait before I’m put on another flight. If I know that I only have to wait a half hour, I might put in a low offer (say $50) but if I’d have to wait until the next day, I’d want quite a bit more since I’d have to factor in expenses for hotel, transportation, food, etc.
There’s another wrinkle here. Is it actual cash or a partial refund being offered, or a voucher? If it’s a voucher, I’d want to know ahead of time what the limitations are. I’d much rather have $200 in hand than a voucher for $200 that I must use by the end of the next month.
It seems I value my time more than most people, so I’m guessing I would never make it to the low bidders list. I have just paid $200 extra (per seat, there’s two of us) to shave off 4 hours on the travel time. So I would not consider a rescheduling for less than $400 (uncertainty costs extra). Double that figure if I’m travelling with kids.
My WTP depends on the length of the wait until the next available flight, another factor not included in the pre-check-in bidding.
i was bumped on us air in las vegas (flying to phoenix) on monday at 11:30 am. i took the 1pm flight and made my connection flight.
inconvenience = none, i still had an hour long connection and made it where i was going.
payoff = free coach voucher good for one year.
it would make sense to me that they ask for volunteers by offering a $100 voucher, if they dont get people go to a $200 voucher, and so on.
Giving cash is more expensive to the airlines because of the potential for theft and because many vouchers (like gift cards) are never used.
@ #19: Good point. If I wanted to make sure I was on the flight out I’d just put $10,000 down.
I thought of a brilliant way that airlines could save money on buybacks.
They could not overbook the flights in the first place.
There’s probably some obvious reason why they do it, I’ve never learned what it is.
nope, not quite perfect price discrimination. We still have to factor in a few cognitive variables, namely what they believe OTHER people’s price to be. If they think other people will accept lower price, it will deflate their price, and an opposite effect if their belief is reversed.
#15 – Having worked for an airline, they overbook flights because historically, about 10% of the passengers booked on a flight will miss it, due to connections, security lines, or just plain not showing up. It sounds absurd, I know, but I’ve worked at the gate for a major airline and have seen this to be true.
#13 – Many airlines will offer money/travel credit amounts based on how long the passenger has to wait for the next flight. For example, if it’s less than an hour, it could be only $100. 2-4 hours could be $200, 4-8 hours could be $400, etc.
#6 – What’s to stop people from buying a bunch of tickets for high demand flying days like Thanksgiving weekend and then just scalping them? I don’t think that would work well at all, plus it would lead to even more of nightmare overbooking, because you’d have scalpers still holding seats reserved, the airline wouldn’t know if they were going to use them or not, thus they would sell more seats to make sure the flights went out full.