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Overbooking is key for maximizing producer surplus. Whether or not that is economically advantageous to the economy as a whole is a different and more complex

Overbooking is key for maximizing producer surplus. Whether or not that is economically advantageous to the economy as a whole is a different and more complex question. But the notion that a company maximizing it's surplus is _always_ beneficial to consumers is tricky but more likely false within the confines of my limited understanding of contemporary economic theory.

jessriedel 9y ago
Why do you think the consumer doesn't capture any of the surplus?
- gshulegaard 9y ago
  There is a difference between Surplus and Utility. I think there is a case to be made that this practice increases Consumer Utility and trades it somewhat for Producer Surplus...but generally speaking, Price Discrimination increases Producer Surplus (thereby reducing Consumer Surplus). I gave a more detailed response to cameldrv.
  - jessriedel 9y ago
    > Price Discrimination increases Producer Surplus (thereby reducing Consumer Surplus). Price discrimination does not necessarily reduce consumer surplus. In this case in particular, there is a large surplus being created by the fact that planes fly more full, and I don't know any reason to think that consumers don't capture much or most of this .
    - gshulegaard 9y ago
      I would be interested to see how you would graph price discrimination not reducing consumer surplus. Price Discrimination in itself is about redistributing surplus from consumer to producer. > a large surplus being created by the fact that planes fly more full I think you are conflating surplus with utility. Full flights have more utility than not full flights...but the market surplus available is unaltered. Maximizing utility is not a bad goal to have...but it is distinct from Consumer and Producer surplus. > I don't know any reason to think that consumers don't capture much or most of this . Because in general most of the surplus is captured by the Producer and the producer doesn't have any incentive to redistribute it back to the consumer. Not having an incentive doesn't mean they don't, I am just pointing out airlines aren't incentivized to reduce the seat cost of a late purchaser by the amount of the cancellation fee for the person that cancelled their flight...or even offer the seat at the price the original person paid. Anecdotally (as mentioned in my other comment) we can compare United to Vrigin. Let's assume that a whole bunch of "surplus" is created by overbooking. United overbooks, Virgin does not. If the consumer captures most of this than United flights should be cheaper than Virgin ones in almost every way (ticket price, bag check fees, cancellation provisions, etc.). I fly from SFO-PDX twice a month. Virgin America consistently has lower priced fares than United. This is observational and anecdotal...but the result casts doubt on the hypothesis that the consumer captures most of the surplus generated by overbooking. Admittedly, I wouldn't expect the consumer to do so from a purely theoretical stand point .
      - jessriedel 9y ago
        I don't think you know what these terms mean.
        gshulegaard 9y ago
        Perhaps I am confused. It's been a little while...but do you have a better grasp/definition? https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/consumer-producer-surplus-tut/v/producer-surplus https://www.khanacademy.org/economics-finance-domain/microec... http://www.economicsonline.co.uk/Business_economics/Price_discrimination.html http://www.economicsonline.co.uk/Business_economics/Price_di... https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility http://thismatter.com/economics/price-discrimination.htm http://thismatter.com/economics/price-discrimination.htm
        jessriedel 9y ago
        > I think you are conflating surplus with utility. Full flights have more utility than not full flights...but the market surplus available is unaltered. Utility is quantity that is measured with respect to an individual (subjective), whereas surplus is an objective measure. This is but one difference, and I am not conflating them. Fuller flights (less dead-weight loss) means there is more surplus to go around, and which will in general be divided up between the buyers and sellers. I could say similar things about your understanding of price discrimination. My guess is that most of your confusion comes from thinking in terms of an idealized model where prices are dominated by marginal costs, whereas fixed costs for planes are very large. This can all be inferred from the definitions you link to, you just haven't internalized them.
cameldrv 9y ago
It's necessary to maximize total surplus as well. If someone wanted to get on the plane, and they took off with a seat empty, that's a deadweight loss. The guy sitting next to an empty seat is a little happier, but it's pretty minimal. United increasing the maximum bump fee completely solves the problem. Short of the apocalypse, you're going to find plenty of takers on any flight for $10k, even if it's a multiple day delay. The people who take the payoff are better off -- if they weren't, they wouldn't have taken the voluntary deal to fly later. Then the airline just needs to gather some statistics about how high the auctions go, and optimize the overbook rate to maximize their revenue. Everyone then is better off. In fact, on a lot of flights, you can probably find multiple people to bump with just a token payment -- they'd rather stay another day. The other great thing about dynamic overbooking like this is that you never have to have a sold out flight, some of them are just really expensive. Someone who really needs to be on a plane walks up and plunks down $5000 or something, and the airline finds the least disrupted passenger, and pays him a few hundred. The bumped guy is happy to have the money, the last minute guy is happy to be on the plane, and the airline is happy to make $4700 extra. This works even better with a name-your-price bump question on checkin for flights that are oversold. Even if it's nonbinding, the airline now knows that it has willing passengers to bump and can keep selling tickets.
- gshulegaard 9y ago
  This is why I left it vague...it really is a complicated issue with several angles. That...and my Bachelors only goes so far. That said, I think you are conflating a couple of economic principles. > It's necessary to maximize total surplus as well. If someone wanted to get on the plane, and they took off with a seat empty, that's a deadweight loss. I think you are confusing utility [1] with surplus somewhat here. If someone wanted to get on and they took off with an empty seat that is a loss in Utility. If the airline turns around and sells that seat to the new person that increases Producer Surplus (and conversely decreasing Consumer Surplus) to increase Utility. I don't think this situation (empty seat) is DWL in the traditional sense [2]. The traditional DWL scenario is when producers could supply more but don't because of pricing constraints or other artificial ceilings/floors. It is definitely a marketing allocation inefficiency which results in Utility loss and I am kind of interested to see if there are better quantifications of this loss...but it isn't a DWL in surplus technically. > Everyone then is better off. In fact, on a lot of flights, you can probably find multiple people to bump with just a token payment -- they'd rather stay another day. It's totally possible that everyone can be better off. The issue isn't about when everyone is better off...it's when the system breaks down and you have situations where no one wants to make that trade. > The bumped guy is happy to have the money, the last minute guy is happy to be on the plane, and the airline is happy to make $4700 extra. This is an example of maximizing producer surplus. In my mind it's a variation of Price Discimination [3]. And while this overall beneficial situation is plausible, it isn't really overbooking. For me, overbooking is basically selling more goods than you actually have and playing on the statistics trying to bank on people not making the flight. If you sell 30 seats and 5 people don't show, you take off with 25 people on board. If you sell 35 seats and 5 don't show, you take off with a full flight and pocket some additional revenue from the 5 no shows. Now there is a lot of gray area since most no shows are from missed connections and so some of that additional revenue can go back into the system to allow for cheaper cancellation fees as well as accommodating rescheduling costs for these missed connections. But in general I suspect that producer surplus increases more than the gain in consumer utility. > This works even better with a name-your-price bump question on checkin for flights that are oversold. Even if it's nonbinding, the airline now knows that it has willing passengers to bump and can keep selling tickets. This is again, Price Discrimination but now adding information imbalance in order to help the airline more effectively Price Discriminate thereby maximizing their Producer Surplus. Technically the United situation isn't the result of overbooking anyway...but I still think the practice warrants scrutiny. United's recent announcement to increase payouts and mileage compensation is testament to the fact that there was Producer Surplus to spare. Like I said, all of this is speculative discussion and there is a lot of gray area. It is also plausible that overbooking results in maximizing Utility and an even handed redistribution of benefits to both producers and consumers. But I believe Producers are driven by incentives...and they don't have strong incentives to share the benefits of overbooking altruistically back to the consumer. I fly from SFO - PDX every other weekend and consistently, no matter how early I book, Virgin America flights are cheaper than United and Virgin doesn't overbook whereas United does. Generally speaking, if United were even slightly returning the added revenue from overbooking to the consumer shouldn't their flights be cheaper than non-overbooked competitors? Again this observation and subsequent question is anecdotal and broad...but I like it for FFT. [1] https://en.wikibooks.org/wiki/Principles_of_Economics/Utility https://en.wikibooks.org/wiki/Principles_of_Economics/Utilit... [2] https://en.wikipedia.org/wiki/Deadweight_loss https://en.wikipedia.org/wiki/Deadweight_loss [3] http://thismatter.com/economics/price-discrimination.htm http://thismatter.com/economics/price-discrimination.htm

jessriedel 9y ago

Why do you think the consumer doesn't capture any of the surplus?

gshulegaard 9y ago
There is a difference between Surplus and Utility. I think there is a case to be made that this practice increases Consumer Utility and trades it somewhat for Producer Surplus...but generally speaking, Price Discrimination increases Producer Surplus (thereby reducing Consumer Surplus). I gave a more detailed response to cameldrv.
- jessriedel 9y ago
  > Price Discrimination increases Producer Surplus (thereby reducing Consumer Surplus). Price discrimination does not necessarily reduce consumer surplus. In this case in particular, there is a large surplus being created by the fact that planes fly more full, and I don't know any reason to think that consumers don't capture much or most of this .
  - gshulegaard 9y ago
    I would be interested to see how you would graph price discrimination not reducing consumer surplus. Price Discrimination in itself is about redistributing surplus from consumer to producer. > a large surplus being created by the fact that planes fly more full I think you are conflating surplus with utility. Full flights have more utility than not full flights...but the market surplus available is unaltered. Maximizing utility is not a bad goal to have...but it is distinct from Consumer and Producer surplus. > I don't know any reason to think that consumers don't capture much or most of this . Because in general most of the surplus is captured by the Producer and the producer doesn't have any incentive to redistribute it back to the consumer. Not having an incentive doesn't mean they don't, I am just pointing out airlines aren't incentivized to reduce the seat cost of a late purchaser by the amount of the cancellation fee for the person that cancelled their flight...or even offer the seat at the price the original person paid. Anecdotally (as mentioned in my other comment) we can compare United to Vrigin. Let's assume that a whole bunch of "surplus" is created by overbooking. United overbooks, Virgin does not. If the consumer captures most of this than United flights should be cheaper than Virgin ones in almost every way (ticket price, bag check fees, cancellation provisions, etc.). I fly from SFO-PDX twice a month. Virgin America consistently has lower priced fares than United. This is observational and anecdotal...but the result casts doubt on the hypothesis that the consumer captures most of the surplus generated by overbooking. Admittedly, I wouldn't expect the consumer to do so from a purely theoretical stand point .
    - jessriedel 9y ago
      I don't think you know what these terms mean.
      - gshulegaard 9y ago
        Perhaps I am confused. It's been a little while...but do you have a better grasp/definition? https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/consumer-producer-surplus-tut/v/producer-surplus https://www.khanacademy.org/economics-finance-domain/microec... http://www.economicsonline.co.uk/Business_economics/Price_discrimination.html http://www.economicsonline.co.uk/Business_economics/Price_di... https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility http://thismatter.com/economics/price-discrimination.htm http://thismatter.com/economics/price-discrimination.htm
        jessriedel 9y ago
        > I think you are conflating surplus with utility. Full flights have more utility than not full flights...but the market surplus available is unaltered. Utility is quantity that is measured with respect to an individual (subjective), whereas surplus is an objective measure. This is but one difference, and I am not conflating them. Fuller flights (less dead-weight loss) means there is more surplus to go around, and which will in general be divided up between the buyers and sellers. I could say similar things about your understanding of price discrimination. My guess is that most of your confusion comes from thinking in terms of an idealized model where prices are dominated by marginal costs, whereas fixed costs for planes are very large. This can all be inferred from the definitions you link to, you just haven't internalized them.

cameldrv 9y ago

It's necessary to maximize total surplus as well. If someone wanted to get on the plane, and they took off with a seat empty, that's a deadweight loss. The guy sitting next to an empty seat is a little happier, but it's pretty minimal. United increasing the maximum bump fee completely solves the problem. Short of the apocalypse, you're going to find plenty of takers on any flight for $10k, even if it's a multiple day delay. The people who take the payoff are better off -- if they weren't, they wouldn't have taken the voluntary deal to fly later. Then the airline just needs to gather some statistics about how high the auctions go, and optimize the overbook rate to maximize their revenue. Everyone then is better off. In fact, on a lot of flights, you can probably find multiple people to bump with just a token payment -- they'd rather stay another day. The other great thing about dynamic overbooking like this is that you never have to have a sold out flight, some of them are just really expensive. Someone who really needs to be on a plane walks up and plunks down $5000 or something, and the airline finds the least disrupted passenger, and pays him a few hundred. The bumped guy is happy to have the money, the last minute guy is happy to be on the plane, and the airline is happy to make $4700 extra. This works even better with a name-your-price bump question on checkin for flights that are oversold. Even if it's nonbinding, the airline now knows that it has willing passengers to bump and can keep selling tickets.

gshulegaard 9y ago
This is why I left it vague...it really is a complicated issue with several angles. That...and my Bachelors only goes so far. That said, I think you are conflating a couple of economic principles. > It's necessary to maximize total surplus as well. If someone wanted to get on the plane, and they took off with a seat empty, that's a deadweight loss. I think you are confusing utility [1] with surplus somewhat here. If someone wanted to get on and they took off with an empty seat that is a loss in Utility. If the airline turns around and sells that seat to the new person that increases Producer Surplus (and conversely decreasing Consumer Surplus) to increase Utility. I don't think this situation (empty seat) is DWL in the traditional sense [2]. The traditional DWL scenario is when producers could supply more but don't because of pricing constraints or other artificial ceilings/floors. It is definitely a marketing allocation inefficiency which results in Utility loss and I am kind of interested to see if there are better quantifications of this loss...but it isn't a DWL in surplus technically. > Everyone then is better off. In fact, on a lot of flights, you can probably find multiple people to bump with just a token payment -- they'd rather stay another day. It's totally possible that everyone can be better off. The issue isn't about when everyone is better off...it's when the system breaks down and you have situations where no one wants to make that trade. > The bumped guy is happy to have the money, the last minute guy is happy to be on the plane, and the airline is happy to make $4700 extra. This is an example of maximizing producer surplus. In my mind it's a variation of Price Discimination [3]. And while this overall beneficial situation is plausible, it isn't really overbooking. For me, overbooking is basically selling more goods than you actually have and playing on the statistics trying to bank on people not making the flight. If you sell 30 seats and 5 people don't show, you take off with 25 people on board. If you sell 35 seats and 5 don't show, you take off with a full flight and pocket some additional revenue from the 5 no shows. Now there is a lot of gray area since most no shows are from missed connections and so some of that additional revenue can go back into the system to allow for cheaper cancellation fees as well as accommodating rescheduling costs for these missed connections. But in general I suspect that producer surplus increases more than the gain in consumer utility. > This works even better with a name-your-price bump question on checkin for flights that are oversold. Even if it's nonbinding, the airline now knows that it has willing passengers to bump and can keep selling tickets. This is again, Price Discrimination but now adding information imbalance in order to help the airline more effectively Price Discriminate thereby maximizing their Producer Surplus. Technically the United situation isn't the result of overbooking anyway...but I still think the practice warrants scrutiny. United's recent announcement to increase payouts and mileage compensation is testament to the fact that there was Producer Surplus to spare. Like I said, all of this is speculative discussion and there is a lot of gray area. It is also plausible that overbooking results in maximizing Utility and an even handed redistribution of benefits to both producers and consumers. But I believe Producers are driven by incentives...and they don't have strong incentives to share the benefits of overbooking altruistically back to the consumer. I fly from SFO - PDX every other weekend and consistently, no matter how early I book, Virgin America flights are cheaper than United and Virgin doesn't overbook whereas United does. Generally speaking, if United were even slightly returning the added revenue from overbooking to the consumer shouldn't their flights be cheaper than non-overbooked competitors? Again this observation and subsequent question is anecdotal and broad...but I like it for FFT. [1] https://en.wikibooks.org/wiki/Principles_of_Economics/Utility https://en.wikibooks.org/wiki/Principles_of_Economics/Utilit... [2] https://en.wikipedia.org/wiki/Deadweight_loss https://en.wikipedia.org/wiki/Deadweight_loss [3] http://thismatter.com/economics/price-discrimination.htm http://thismatter.com/economics/price-discrimination.htm