Flight Overbooked? Use Game Theory to Get the Biggest Payout

The practice of overbooking flights was thrust into the spotlight when a bloodied United Airlines passenger was dragged off a plane at O’Hare airport last month.

Most airlines sell more tickets than available seats in order to make additional profits when a passenger doesn’t show up for a flight – essentially by selling one seat two times. But when everyone is in attendance, airlines look for volunteers willing to give up their seats for compensation.

When there are no takers – as happened during the now infamous United Airlines flight in April – passengers can be involuntarily bumped.

In 2016, about 475,000 airline passengers in the U.S. were bumped from their flights, according to the Department of Transportation.

More than 40,000 of those passengers were bumped involuntarily.

Airline payout policies

How much passengers are compensated depends on the airline’s policy.

Following the April 9 incident, United Airlines said it will offer travel vouchers of up to $10,000 to volunteers willing to give up their seats on overbooked flights. If multiple seats are needed and several people volunteer to leave the scheduled flight, United will typically give all volunteers the most valuable voucher, according to reporting by the Chicago Tribune.

American Airlines will compensate bumped volunteers based on their individual bids, according to an American spokeswoman referenced in the Tribune article.

For example: If two volunteers are needed to give up seats on an American Airlines flight, passengers could be compensated for different amounts, based on what offer they accept.

On a United flight, both passengers would receive the airline’s highest offer.

So how can a passenger get the biggest bang for their buck and turn what could be a frustrating situation into a profitable one?

Game theory, a mathematical study of strategic interaction, can help.

How to play the game

James Schummer, associate professor of managerial economics at Northwestern University, said game theory is used, whether the players know it or not, when individuals facing a decision must make a strategic choice based on their fellow players and a possible payoff.

The game could be literal or figurative.

“It could be a small number of firms competing with each other in a market by setting their prices and choosing a product line or it could be professional sports teams playing a game against each other and they’re deciding what strategies to use,” Schummer said.

“Like in football, you can pass or you can run,” he said.

Strategy depends on how many seats the airline needs to recoup and what their compensation policy looks like.

“If the airline only needs one seat, there’s only one way to run the auction,” Schummer said. “They keep raising it until someone jumps in.”

In that scenario, Schummer said a passenger can jump in right away or hold off and gamble, to see if the airline raises the price more before jumping in.

“To answer that question, the passenger would have to make some assessment about what they think the other bidders or passengers will do,” Schummer said. “If you have a pretty good feeling that you’re ready to jump in a lot earlier than everybody else, then you should probably hold out a little longer.”

Schummer said American’s policy is a discriminatory price auction, which should motivate passengers to “hold out” at the lowest offer, if possible, and weigh the odds as the offers increase.

“So if it’s going from $200 to 400, you’re talking about doubling your money, so maybe it’s worth taking that chance and holding out,” Schummer said. “But if it’s going from $800 to $1,000, you’re only getting an extra 200 bucks, but now you’re risking losing out on the $800 that they’re offering now.”

Schummer calls United’s overbooking policy a uniform price auction, in which overbooked passengers should take the payout as soon as they’re comfortable.

“Get in right now because whatever happens, they’re going to raise the price anyway, with or without you,” Schummer said. “You should jump in as soon as you’re ready. That locks in your win. Your price will be determined by the other bidders anyway.”

Teaming up for the most money?

In theory, the passengers of an overbooked United flight could band together and agree to hold out until the airline offers its maximum compensation of $10,000.

In practice, Schummer thinks that’s unlikely to happen.

“You’d have to coordinate 100 people to pull this off, so that’s not going to happen,” Schummer said. “And secondly, you’re going to have someone who cheats on the coalition and backs out and says, ‘Oh, I’ll take it for $9,000,’ and takes the money for themselves.”

From the perspective of airlines and their payouts to customers, Schummer said auction types tend to have similar results.

“In theory, on average, both auctions kind of look the same,” Schummer said. “If you have savvy or sophisticated bidders playing these kinds of games, the rules don’t really matter. They don’t change how much you pay out on average.”


Related stories:

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