As the topic of passengers being hauled off of airplanes hits the headlines, spare a moment to remember how an economist pioneered the idea that if you had a ticket, and the airline wanted to bump you off the flight, the company needed to hold an auction and offer compensation to find a passenger willing to stay back.
It\’s been almost a half-century since Julian Simon wrote \”An Almost Practical Solution to Airline Overbooking,\” which was a two-page note in the May 1968 Journal of Transport Economics and Policy (pp. 201-2). Here\’s how Simon described the idea in 1968:
Perhaps the reader has suffered a fit of impotent rage at being told that he could not board an aeroplane for which he held a valid ticket. The explanation is clear, and no angry letter to the president of the airline will rectify the mistake, for mistake it was not. The airline gambles on a certain number of cancellations, and therefore sometimes sells more tickets than there are seats. Naturally there are sometimes more seat claimants than seats.
The solution is simple. All that need happen when there is overbooking is that an airline agent distributes among the ticket-holders an envelope and a bid form, instructing each person to write down the lowest sum of money he is willing to accept in return for waiting for the next flight. The lowest bidder is paid in cash and given a ticket for the next flight. All other passengers board the plane and complete the flight to their destination.
All parties benefit, and no party loses. All passengers either complete their flight or are recompensed by a sum which they value more than the immediate completion of the flight. And the airlines could also gain, because they would be able to overbook to a higher degree than at present, and hence fly their planes closer to seat capacity. …
But of course this scheme will not be taken up by the airlines. Why? Their first response will probably be \”The administrative difficulties would be too great\”. The reader may judge this for himself. Next they will suggest that the scheme will not increase net revenue. But the a priori arguments to the contrary make the scheme worth a trial, and the trial would cost practically nothing and would require no commitment.
What are the real reasons why this scheme will not be adopted? Probably that \”It just isn\’t done\”, because such an auction does not seem decorous; it smacks of the pushcart rather than the one price store; it is \”embarrassing\” and \”crass\”, i.e., frankly commercial, like \”being in trade\” in Victorian England.
Simon\’s idea seemed a little ridiculous to a number of commentators back in 1968, the sort of hypothetical, unworldly, and impractical idea that only an economist could favor. After being enacted and around for a few decades, of course, it now seems obvious. In the classroom, it\’s a nice practical real-world example of what is arguably a Pareto gain.
As Cass Sunstein and others have recently written, the obvious solution to the overbooking problem–at least if you are thinking like an economist–is to change the regulations that limit how much airlines are allowed to pay so that a few passengers can take a later flight. Of course, airlines dislike the idea. When Simon asked why the scheme wouldn\’t be adopted in the first place, he left out one reason: \”The airline already has the money you paid for a ticket, and don\’t want to return any of it to you if at all possible.\” But there\’s a social and political tradeoff here: if airlines want to keep having the freedom to overbook their flights, then they need to face the reality of paying a compensation level so that when a few ticketed passengers can\’t be accommodated on a given flight, those passengers are willing to postpone their flight voluntarily.