The Solution to Avoid IDBs: VDB Auctions

The Wall Street Journal has an excellent editorial today arguing that rather than more government rules, airlines should adopt an auction-style system to deal with overbooked flights.

…In the first quarter of this year, some 23,380 passengers were forced to give up their seats, a 17% increase over last year and the highest rate in at least a decade as airlines try to serve passengers with fewer flights. Bumping only affects two of every 10,000 passengers, but that is small consolation for those who miss appointments or family obligations…

These stats amaze me. Unfortunately, law school has kept me busy and I’ve done only about half the amount of travel at this point of the year than I did last year. Still, I have not scored a single bump this year. Although I only fly two airlines (UA and CO) that apparently have their act together, a 17% increase in IDBs bemuses me.

Which brings us to [the late economist Julian] Simon, who in 1977 on these pages proposed an auction system in which airlines would offer passengers on overbooked flights a gradually rising reward for giving up their seat. For example, if 115 passengers showed up for a flight with 100 seats, the airline would start to offer, say, a $300 voucher to passengers who agreed to take a later flight. If there weren’t enough takers at $300, the airline would increase the offer to $400, then $500, a free round trip ticket, etc., until 15 passengers volunteered. Auctions like this are highly efficient ways of allocating a scarce resource.

Yes! Yes! Yes! And you know what? If UA started the bidding at $100, I’d still take it under many circumstances.

Remember this incident, when I volunteered to give up my seat on a US Express flight that needed two volunteers, but because another volunteer could not be found, I had to take the flight and two people were bumped against their will? A $450 voucher was a great deal for me, but apparently not for anyone else on the 50-seat jet. But if a $600 or $800 voucher was being offered, I bet another volunteer would have been found. No IDBs, no cash out of pocket for US…

When economist Milton Friedman heard of Simon’s auction solution, he wrote that he was "utterly baffled" that "opportunities for large increments of profits are being rejected [by the airlines] for wholly irrational reasons." It is doubly baffling that 34 years later many airlines are still acting irrationally to the detriment of passengers and shareholders. Auctions make more sense than fines.

Well said. Airlines would be wise to re-evaluate their bump policies.

^{(I apologize that the WSJ article I linked to requires a subscription. The gist of the article is re-produced above.)}