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No More Auctions on the Tarmac.

When you think about United Airlines it is hard not to recall all the PR disasters that have unfolded over the years. But as Business Insider points out the fiasco could have been easily avoided with an auction similar to that of a first price auction. Typically, airlines book more seats than they actually have, based on the assumptions that people will not show up. But in the case where there are more people than seats, an auction develops.

The previous model followed by the airlines was based on an ascending auction. As seen in lecture, in order to have a dominant strategy you need to bid your value. Or in this case, how much passengers valued their seats. However, the way United conducted their auction was by placing a market cap on it. Thereby preventing individual bidders from reaching their value. Rather than removing the limitations, United Airlines decided to remove passengers. Not only was placing a max for bids a bad strategy but holding an open auction while the plane sat on the tarmac was not a great one either.

United has now decided to implement an auction similar to that of a first price auction, but with the lowest bid chosen. However, that new system for overbooking is not new, as seen with the proposition by K.V Nagarajan from Susquehanna University, dating back to the in 1960’s. Back then he proposed writing in sealed envelopes the bid to give up your seat. Now, as technology has evolved passengers will be able to enter their bids on their mobile devices or check-in kiosks.  The new auction system will allow passengers to bid up to $10,000 dollars. The new system has resulted in a “90 percent year-over-year reduction in involuntary denied boardings.”

However as discussed with first-priced auctions how much to bid is more complicated, as bidding one’s value is no longer the dominant strategy.  In the case for bidders for United Airlines. It is better for them to bid greater than their value. As the bid with the lowest value will be chosen. If they choose too close to their value their payoff won’t be very large in case they win. Then if they choose below their value they will end up losing. So, in this case, to obtain a positive payoff the bidders will have to bid slightly upwards. This type of auction seems to be the reverse of the first-priced auction but some of the concepts behind it are the same, such as the blind bidding.

While United Airlines offers $10,000 dollars, the probability a flyer will obtain this amount is very unlikely, simply based on how the auction is set up. This is due to the fact that with a larger pool of competing bidders, the winning bid is likely to be smaller.





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