Tuesday, January 4, 2011
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.