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Comment by hedora | Hacker News Reader

I think the problem is that the passengers can collude to take the airline's money hostage, since this turns into an unregulated auction of sorts.

One person is willing to take $10,000? Great. Every other passenger is willing to refuse $9999 for the low price of $9999. Now, each passenger needs a 1/Nth of the payout, and that fraction needs to be >$10,000.

Now the negotiation's starting offer becomes: "You overbooked by one seat. How much will it cost you to ground the plane, or fly it empty and bump us all to other flights? Give us that much money."

Honestly, this outcome would be fine by me, since it would correct poor airline behavior pretty rapidly. They already let you buy standby tickets; overbooking is double dipping.

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Getting 100+ strangers to collude like that seems infeasible. The incentive to defect from the arrangement would be huge.

Yeah, I doubt the people paying $200 each way on a trans-US flight are going to hold out for $10,000. Once you're at 5-10x of your ticket price, people who actually have flexible schedules are going to be pretty interested. On most overbooked flights this needs to attract <5 people, so hard to imagine the passengers taking "the airline's money hostage".

The problem is, risk management for big corporations still requires these kinds of guarantees against such events, improbable though they may be, in order to quantify the downside. There's a big difference between:

1) "Come on, you can't get 100 people to collude." vs

2) "There is a law that ensures our per-passenger liability saturates at $1350 plus re-booking costs."

For similar reasons, they insure against a hundred different possibilities and require low-personal-judgment protocols to comply with the policy terms.

So pay some trivial amount for insurance and let the insurance companies quantify the risk. Or refrain from overbooking. I see no problems here, just different solutions.

Insurance would be pointless for this problem. Insurers aren't magic risk-vanishers; they'd still specify an upper bound on their payout, leaving the airline with the unbounded amount, but the entire problem here is to upper-bound the downside!

That only leaves a) a law saturating the liability, or b) a contractual provision (and law validating such provisions) that saturates the liability. It still would explicitly prevent the possibility of colluders extracting an unbounded amount to be bumped.

You could buy an insurance policy that caps at, say, $100 billion, and then plan to go out of business if it somehow takes more than that to buy out someone's seat.

Or you could avoid the Rube Goldberg and just be upfront about the "buyout option"/"bid max" you're reserving on every ticket.

Or you could avoid that Rube Goldberg and just pay what it takes. The risk of a multi-million-dollar payout for a few oversold seats is lower than the risk of, say, being put out of business because your negligence caused one of your aircraft to crash into Manhattan and you end up being liable for tens of billions in damages.

Everyone has a price they would be willing to give up their seat and it will be different than the person next to them. If you are traveling on a last minute ticket to visit a family member in the hospital, you might not be willing to delay your travel for any amount of money. If you are traveling on a vacation, the amount might be relatively little. Also some passengers will value some things more than others - offering a year of gold membership might entice a business traveller, offering money might entice a college student, upgrades to first class might entice others, etc. The idea that 100 people have the same utility curves is not reasonable.

Obviously it is more efficient for everyone if this bidding is done before you get to the airport, the system described in the article is one example.

"passengers can collude..."

aka collective bargaining, which in principle should be encouraged, to counter power imbalances.

https://en.wikipedia.org/wiki/The_Logic_of_Collective_Action

There's a simple way to resolve that. When you run out of seats, stop selling tickets.

Yeah, let's not feel bad for the airlines. They do it to themselves.

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