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Game Theory and Auction Strategy to resolve Overbooking

http://www.npr.org/2017/04/13/523726313/how-game-theory-relates-to-airline-booking

Earlier this year, there was a United airline scandal where a passenger was forcibly removed from their seat on the airplane because it was overbooked. Once all the anger and hatred towards United airlines passed, the question still remained of what is the possible solution to resolve situation of overbooking enabled by the airlines. Professor Gans, who studies strategic management in University of Toronto suggests, applying game theory.

And the application of game theory analysis makes sense as the situation fits the requirements perfectly. It has all three parts that make a game. First, a set of participants, second, set of options, and third, the consequences of each player’s strategies on each other. For the situation at hand, the participants are the passengers seated on the plane. The options which they have are either one, remaining on their seats or giving up their seats for the voucher which the airline offers. And the consequence is that if other passengers don’t give up their seats you might be forced to give up your seat or if someone else gives up their seats, you would not have to give up your seat. The game which is suggested by Professor Gans is descending auction or first place sealed auction. He suggests the airlines can either ask the passengers how much they want as compensation for giving up their seat or begin the voucher at a very high price and decrease the bid.

This is auction strategies discussed in class. During class, it was mentioned that descending auction utilizes the same strategy as first price sealed auction. Which means either way, the passengers would be applying the same strategies with the knowledge which they’ll be given. It also means there are two different kind of system which the airlines can implement.

If the descending bid auction was taken into effect, then the passengers will publically notified starting from the highest bid, therefore the participants will be aware of other passenger’s thoughts and bids. Whileas if the first price sealed auction takes place, the participants will not be aware of the other people’s bids. Although in a strategic sense, this doesn’t make a difference, the social situation adds in an addition factor that differentiates the two. The first will let others see how much the participant would pay to give up their seat, while the latter will allow the participant to be more secretive of the amount which the participant is receiving. This will increase the likeliness of more participation from the passengers especially since a lot of people are scared of social stigmatization and acting on certain things for monetary purposes.

So then analyzing the situation, the latter option – first price sealed auction – seems to be the better solution alternative because it will encourage more people to pitch the price which they’ll take to give up their seat and the auction results tend to go more favorably for the auctioneer when there are more competition for the same service or good. And hopefully hearing the suggestions from multiple sources, the airlines can create a plan to resolve the overbooking situations in the future. It was really interesting how game theory and different kinds of auction strategies can applied to daily problems people face all over the world.

 

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