Auctions behind Airlines overselling seats
With the finals schedule out, I have been searching for plane tickets back home. There are various routes available – direct flight from New York, transfer from within the states, or transfer in another country. And this could be related to matching markets which we learned in class.
On the left, we have the various flight options – luxurious, budget, direct, or transfer. On the right, we have customers with different preferences for these flights. Then, customers are matched with the option which yields the highest payoff. This seems pretty direct, but the game theory behind how seats are allocated is far more complicated than we expected.
Some of us might know, airlines often oversell the number of seats. Given that there is a possibility that passengers cancel their flights at the last minute, the airline industry makes use of this idea to sell more seats than they have in order to earn a higher profit. This has resulted in some situations where the airlines have to reject some passengers from boarding. This was what happened in the United Airlines Fiasco when they dragged a passenger down an overbooked plane. This was an extreme case in which they did not settle it in a respectful manner. Most of the time, airlines will offer a sum of money to anyone who wishes to give up their seats. And this compensation is given via auctioning. This idea of auctioning was rolled out by United Airlines after the incident. The idea is that every passenger writes a sealed bid and whoever’s bid is the lowest will get the bid in return for waiting for the next flight. This leaves the passengers satisfied and airlines could then sell more tickets.
https://www.jstor.org/stable/20052479?seq=1#metadata_info_tab_contents
https://www.npr.org/2017/04/13/523726313/how-game-theory-relates-to-airline-booking