Tuesday, January 4, 2011

Good, but could it be better?

Alex Tabarrok and Jim Ward point out that Delta is now auctioning off travel vouchers when they overbook their seats.

This is appears to be a first price auction, where you get paid your bid if you win. Unfortunately, your optimal bid depends not only on your own value, but also what you think other people will bid and the number of seats needed.

Should Delta switch to a generalized second price auction instead? That would make it more attractive for bidders to just enter their true reservation value without trying to size up and outguess everyone else. Winners would be pleasantly surprised when they were paid MORE money than they bid.


  1. There's a big flaw in your idea: It makes total sense for the consumer. The reason this won't happen is because Delta's model is designed to squeeze the lowest amount out and avoid the higher costs they used to pay for overbooking. Once this database gets big enough, calculus says that each seat cost will get as close to zero as possible. People will continue to bid lower and lower.

    Here's an irony about the whole thing: I just rebooked a two-city flight and was charged $150 for each airline, or $300, just to rebook. Before too long, Delta will make far more per seat on rebooking fees than it will pay out on overbooking.

  2. I think the floor price for a passenger to disrupt their travel plans for the sake of the airline's good will never approach $0 (unless there is some other benefit by switching to another flight i.e. probable weather delays for the currently booked flight). Making a $0 bid even more improbable is that the airline will do everything it can to obfuscate the "clearing price" for each of these auctions so that consumers have little knowledge on how to ensure an auction win. Given that only 2-5 people on a 200+ person flight would "win," and not all flights are overbooked, it would be difficult for savvy travelers to figure out the price needed to win an auction given that many variables would play into the clearing price (existence of same day flights, local inclement weather, congestion in other geographies contributing to inbound aircraft delays).

    While I think its a step in the right direction for Delta, I agree with Erik Brynjolffson that more can be done to turn this into a means of delighting customers who sacrifice convenience for monetary reward.

  3. @Brian: I agree that Delta wants to squeeze out as much revenue as possible. But at least in theory, both the first price and the second price auction raise the same amount of money according the Revenue Equivalence Theorem: http://en.wikipedia.org/wiki/Auction_theory#Revenue_Equivalence

    You raise an interesting point that ticket prices are only one revenue stream for them. There are rebooking fees, all sorts of add on fees, refunds for overbooking, etc. They all interact and affect customer satisfaction in non-linear ways. Meanwhile, the value of seats changes in real time. That's a pretty complex pricing problem.