How airlines use game theory to reduce the number of involuntarily bumped passengers
Because of United’s involuntary ‘de-planing’ of David Dao in April of 2017, overbooking flights has been in the news. The general idea is that, on average, a small percentage of the passengers will not show up for any given flight. Instead of letting these seats fly empty, they are filled by customers who have bought tickets without assigned seating. Overall, this practice is beneficial for both the airline, who makes more money, and the consumer, who pays less per ticket. However, issues arise when airlines estimate poorly, and more people show up than seats on the plane.
The practice of overbooking is legal and is regulated by the DOT. Airlines are mandated to compensate passengers that were involuntarily bumped up to 400% of the original ticket value. However, airlines often get people to voluntarily move to a later flight for far less by offering compensation vouchers. These vouchers can start at a few hundred dollars and, if no one takes it, rise to as much as $10,000.
This system uses game theory to push down the price airlines have to pay bumped passengers. When the voucher is offered, each ticket holder has a choice. Take the voucher or hope no one else takes the voucher and wait for a higher price. If all the ticket holders colluded by not taking the offer until it’s at its maximum value then agree to split part of the reward, the ticket holders gain the most. However, this strategy is nearly impossible in practice because hundreds of strangers would need to work together and if it did, then the airlines would re-evaluate their decisions of overbooking. The vouchers will rarely get to the maximum value because chances are, someone will decide the voucher’s value is worth their time.
In response to the media coverage in April 2017, United has changed how they choose volunteers to bump. Along with an increase maximum dollar value, passengers now choose a voucher value they would take to be bumped while purchasing tickets. This changes the dynamic of choosing a volunteer from bidding to a closed auction. Passengers now can choose a high payout with a very low likelihood getting bumped (or the money) or a smaller payout and a higher chance of getting bumped (or the money). These systems will hopefully reduce the number of passengers that are involuntarily bumped from planes and probably will lower the average voucher value.
https://www.transportation.gov/individuals/aviation-consumer-protection/bumping-oversales
https://news.wttw.com/2017/05/08/flight-overbooked-use-game-theory-get-biggest-payout
https://thepointsguy.com/2017/11/united-compensation-bumped-passengers/