The Game Theory for Airlines: What to Do with Overbooking
With the mess that United Airlines created for itself after a passenger was dragged off a full plane, airlines are now considering adjusting overbooking policies. It is hard for airlines to use appropriate price incentive to make passengers cooperate happily and not trigger public anger, while also controlling the cost. Overbooking is actually a game between airlines and passengers.
Airlines make flights overbooked based on historical data, and they know overbooking is the indispensable way for them to maximize the profits. Since some passengers indeed won’t show up, this decision is smart in most occasions. However, in rare cases, the number of passengers waiting to board exceeds the number of seats. At this time, there is a game between airlines and passengers. “[T]he game involves the airlines’ strategizing the costs—fiscal and otherwise—of flying a plane at less than full capacity, and passengers’ in turn gaming out the value of accepting or declining a monetary offer to give up their seats.” (Jeffrey Kluger, 2017)
“The United Airlines Fiasco: How Game Theory Could Help” has provided some insights. First, airlines should ask people to voluntarily give up seats before boarding. Once people get boarding and sit down, they would value their seats more since the seats become theirs at that moment. If then passengers are asked to exit, they are intending to pursue a higher compensation. Second, the airlines should start with a high offer. If some passengers do not take this perk, they must really need to get to the place. In this way, airlines can exclude those passengers and start to target on other passengers, which is more efficient and should work smoothly without conflicts and violence. Lastly, airlines should make the offer in private instead of in public. If in public, individuals will be easily influenced by other people’s choices. It is more favorable to airlines to ask passengers one on one, in which way individuals are more easily persuaded and less sensitive to other people so that they would intend more to make the choice of giving up. Additionally, Jeffrey Kluger also agrees with this point in his “Why Airline Should Offer a Lot More Cash for Overbooked Seats”. He points out that airlines silently texting passengers the offer would be an effective way to avoid both attempts at collusion and United-typed violent incidents.
This issue is generally discussed in combined perspectives of both game theory and psychology, which provides us with a vivid example of how game theory is applied in real life. In class, we have learned and discussed theoretical model of game theory. It looks simple while it only relates to some single digit numbers as payoffs; however, in real application, game theory could be a really complicated model and have significant impact on corporates’ decisions. With a successful application of game theory model, airlines are supposed to reach the balance of maximizing the profits and comforting passengers who give up their seats, while completely avoiding forceful or violent situations.
Source:
NPR http://www.npr.org/2017/04/13/523726313/how-game-theory-relates-to-airline-booking
Time http://time.com/4744532/overbooked-cash-vouchers/