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Overbooking

Author

Listed:
  • Jeffrey C. Ely
  • Daniel F. Garrett
  • Toomas Hinnosaar

Abstract

We consider optimal pricing policies for airlines when passengers are uncertain at the time of ticketing of their eventual willingness to pay for air travel. Auctions at the time of departure efficiently allocate space and a profit maximizing airline can capitalize on these gains by overbooking flights and repurchasing excess tickets from those passengers whose realized value is low. Nevertheless profit maximization entails distortions away from the efficient allocation. Under regularity conditions, we show that the optimal mechanism can be implemented by a modified double auction. In order to encourage early booking, passengers who purchase late are disadvantaged. In order to capture the information rents of passengers with high expected values, ticket repurchases at the time of departure are at a subsidized price, sometimes leading to unused capacity.

Suggested Citation

  • Jeffrey C. Ely & Daniel F. Garrett & Toomas Hinnosaar, 2017. "Overbooking," Journal of the European Economic Association, European Economic Association, vol. 15(6), pages 1258-1301.
    • Handle: RePEc:oup:jeurec:v:15:y:2017:i:6:p:1258-1301.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvw025
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    Cited by:

    1. Bergemann, Dirk & Pavan, Alessandro, 2015. "Introduction to Symposium on Dynamic Contracts and Mechanism Design," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 679-701.
    2. Akan, Mustafa & Ata, Barış & Dana, James D., 2015. "Revenue management by sequential screening," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 728-774.
    3. Garrett, Daniel F., 2017. "Dynamic mechanism design: Dynamic arrivals and changing values," Games and Economic Behavior, Elsevier, vol. 104(C), pages 595-612.
    4. Deb, Rahul & Said, Maher, 2015. "Dynamic screening with limited commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 891-928.
    5. Dirk Bergemann & Alessandro Pavan, 2015. "Introduction to JET Symposium Issue on "Dynamic Contracts and Mechanism Design"," Cowles Foundation Discussion Papers 2016, Cowles Foundation for Research in Economics, Yale University.
    6. McAdams, David, 2015. "On the benefits of dynamic bidding when participation is costly," Journal of Economic Theory, Elsevier, vol. 157(C), pages 959-972.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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