Wednesday, June 9, 2010

Proper consequences for airline overbooking

I do not normally link to WSJ editorials, but they ran one yesterday on airline overbooking that contains a very important economic lesson.  Right now each airline has its own bumping policy; most provide up to an $800 voucher if they cannot get volunteers to accept smaller bribes.  Such a voucher is obviously inadequate compensation; otherwise, someone would have volunteered to accept it.  One of the most basic principles of economics -- gains from trade between well-informed adults -- is being violated.  Bumped passengers should be allowed to collect enough to offset the inconvenience.

How much more?  The Obama administration is proposing that the upper limit for vouchers be bumped up to $1300.  Although this will help some passengers, the WSJ rightly argues that there should be no upper limit at all.  Instead airlines should conduct proper auctions to ration the available seats.  This would do two good things.  First, passengers would choose whether to take a later flight in response to the airline's offer; no one would be forced off a flight.  Second, airlines would cut back on overbooking.  It could very well cost an airline more than $800 to properly compensate the last overbooked passenger.  Right now airlines have every incentive to sell a ticket on the same date of an overbooked flight for an amount over $800, knowing they will end up ahead.

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