The Game Theory of Overbooking
Posted by Mike Dorf Having just completed a bit of holiday travel, I'm thinking about the game theory of overbooking, which, I discovered upon googling " 'game theory' & overbooking' " has produced a rather substantial literature. Here's what happened on my latest flight, which presents a nicely simple case: About 45 minutes before the scheduled departure, the gate agent announced that the flight was overbooked by one passenger and so the airline was offering the first volunteer a seat on a later flight plus $250 to give up his or her seat on this one. There were apparently no takers, and so 20 minutes later, the offer was upped to $450, whereupon a volunteer came forward. Was this the best deal the airline could get? Quite possibly not. If the volunteer was willing to take the later flight for $450, perhaps he would have been willing to take the later flight for $300, or even for LESS than $250. True, someone whose break-even point is under...