Today is a good day to remember the great Julian Simon

by on April 10, 2017 at 9:44 am in Current Affairs, Economics, Travel | Permalink

Today is a good day to remember the great Julian Simon. Here’s a piece on just one of his many accomplishments.

Julian Simon helped revolutionize the airline industry by popularizing the idea that carriers should stop randomly removing passengers from overbooked flights and instead auction off the right to be bumped by offering vouchers that go up in value until all the necessary seats have been reassigned. Simon came up with the idea for these auctions in the 1960s, but he wasn’t able to get regulators interested in allowing it until the 1970s. Up until that time, Litan writes, “airlines deliberately did not fill their planes and thus flew with less capacity than they do now, a circumstance that made customers more comfortable, but reduced profits for airlines.” And this, of course, meant they had to charge passengers more to compensate.

By auctioning off overbooked seats, economist James Heins estimates that $100 billion has been saved by the airline industry and its customers in the 30-plus years since the practice was introduced.

1 WhoKnew April 10, 2017 at 9:50 am
2 Travis Ormsby April 10, 2017 at 9:52 am

This article was literally the very next thing in my RSS feed after AT’s post. Model this indeed.

3 Tim April 10, 2017 at 9:57 am

Obviously, that is why Alex posted it today!

4 Slocum April 10, 2017 at 10:17 am

It was an example of employee idiocy (or possibly company policy idiocy) and a perfect demonstration of Simon’s wisdom (with voluntary bumping, everybody’s happy — with forcible bumping you may have extremely unhappy customers). Why on earth didn’t they just raise the offer again? They only needed a few seats — surely some passengers would have taken them up on it before the amount went much higher. A few thousand dollars vs the negative publicity from this video? I doubt United will ever make the same mistake again.

5 BC April 10, 2017 at 12:16 pm

“Passengers were allowed to board the flight”

That was probably United’s first mistake: there was probably some sort of endowment effect. It’s interesting that they were not able to find two more passengers to accept the offer of $800+hotel. I guess that means almost all passengers are willing to pay an $800+ premium for (literally) last-minute bookings. Not accepting $800 to get off the plane at the last minute is, of course, equivalent to paying $800 to fly right away instead of the next day.

To your point though, the passenger in question claimed to be a doctor that needed to see patients in the hospital the next morning. I can see why he might value the seat more than other passengers (although it’s not necessarily obvious that it costs the hospital more than $800 to call in an emergency substitute). On the other hand, the airline needed the two extra seats for stand-by crew for another flight. I have no idea what it costs the airline to get two substitutes but, presumably, that sets the upper bound on what they should offer passengers.

Bottom line: no market failure here, just a failure to set up a market. Given that the doctor was chosen at random, it’s highly unlikely that he was one of the two passengers that valued his seat the least. That’s the standard by which non-market solutions, such as random selection, need to be measured against.

6 Slocum April 10, 2017 at 12:54 pm

“That means almost all passengers are willing to pay an $800+ premium for (literally) last-minute bookings.”

Not really — keep in mind that accepting the offer was going to mean a missed evening at home and whole day of missed work (the new flight was going to be at 3PM the next day). The $800 has to compensate for the missed income or loss of a vacation day as well as the inconvenience imposed on families, colleagues, customers, and bosses (and you can imagine all of the above taking a dim view of this especially if it was done selfishly to make a few extra bucks). So it’s really not a very generous offer and I can see people rationally deciding $800 wasn’t worth it without resorting to endowment effects.

“Bottom line: no market failure here, just a failure to set up a market”

But they had a market set up and then decided they didn’t want to paying the going rate and preferred to use brute force (literally) instead. Most people are unfortunately conditioned to accept this kind of abuse from government (eminent domain, the military draft), but not so much from private actors. Although I think it’s significant that it was apparently government agents doing the dragging–if the airline hadn’t been able to call them in, I can’t quite imagine them having the flight crew forcibly eject passengers.

7 yenwoda April 10, 2017 at 1:09 pm

“It’s interesting that they were not able to find two more passengers to accept the offer of $800+hotel.”

I assume the flight was last night, which would mean a lot of people that have be back in the office in the morning.

8 Paul April 10, 2017 at 3:47 pm

Also, if I am sitting on the plane already do I trust that they’ll take my check in luggage off correctly if I have any? What if i have an aisle or window seat, are they promising I’ll get the same or will they shove me in a middle seat? It’s buying a pig in a poke.

9 Paul April 10, 2017 at 3:55 pm

Oh yes, I forgot. It was an $800 voucher. Not $800 cash. If the story I read is right.

To fly another time on United I guess. Thanks a bunch.

10 JWatts April 10, 2017 at 5:47 pm

“Oh yes, I forgot. It was an $800 voucher. Not $800 cash. If the story I read is right.

To fly another time on United I guess. Thanks a bunch.”

This is why I’ve refused to take such offers up, after accepting one once. The voucher ended up having booking restrictions that degraded it’s usefulness to me. Specifically, the voucher ended up having black out dates, couldn’t be used with other promotional deals and expired after one year.

http://airlinevouchers.net/guide.php

11 Steve-O April 10, 2017 at 8:53 pm

The flight was from Chicago to Louisville, right? You could get off the flight, head to the rental car desk, and be in Louisville three hours after the people on the flight. I can’t believe a couple or a family didn’t take the compensation.

12 JWatts April 11, 2017 at 11:58 am

Google has the driving time as 4.5 hours and a rental car for drop off in another state is going to cost you $100 plus gas. And remember the plane had boarded already, so passengers would have to worry about getting their checked luggage back.

Furthermore, the offer was probably an $800 voucher, not cash. Vouchers have significant restrictions that substantially lower their actual value.

Granted, if I was headed home and could, I’d have accepted either $400 in cash, free hotel and a flight the next day (work permitting) or a straight $600 in cash plus a cash refund of my ticket.

13 Dodgy Geezer April 13, 2017 at 1:04 pm

Unfortunately, United did not offer $800. Or $400.

They offered vouchers to that value for flights on United Airlines…

14 Daniel Weber April 10, 2017 at 4:49 pm

They didn’t know the guy they bumped was a doctor.

They should have bumped someone low status. He would have complied and probably not even sued.

15 mulp April 10, 2017 at 5:00 pm

They can bump based on the cheapest fares first. That is the obvious way to cut the compensation cost.

16 Rock Lobster April 10, 2017 at 10:36 am

Actually it was the customer who initiated violence against the airline by refusing to vacate their property under the terms of his contract.

17 Ivo April 10, 2017 at 1:26 pm

Nobody cares whether United was legally right. The only thing that matters is that everyone thinks they were morally wrong.

18 prior_test2 April 11, 2017 at 4:46 am

‘Nobody cares whether United was legally right.’

According to the discussion here, United was likely not actually legally right – ‘”Failure to follow flight crew instructions” – you mean the instructions to leave in violation of the Contract of Carriage? Rule 21 spells out the only reasons United can remove someone from an aircraft, none of which applied to this customer. By boarding him, they threw Rule 25 out the window. ‘ http://www.airliners.net/forum/viewtopic.php?f=3&t=1360189

19 Slocum April 10, 2017 at 2:31 pm

And how many of the passengers on the plane were aware of the ‘we reserve the right to kick you off the plane at any time for any reason or no reason’ clause of the implicit contract? My guess would be approximately…zero. It’s funny how the airlines have a fairly long list of ‘important information’ they subject you to before takeoff on every flight but somehow never include that one.

20 Enrique April 10, 2017 at 3:07 pm

How many lame MR commentators have heard of the unconscionability doctrine in contract law?

21 Daniel Weber April 10, 2017 at 5:46 pm

It’s not unconscionable to oversell a service and then compensate those you can’t serve.

22 prior_test2 April 11, 2017 at 4:47 am

See above in terms of CoC and what the airline is allowed to do and not do.

23 Bob from Ohio April 10, 2017 at 2:47 pm

A breach of contract is not “violence”.

24 Rock Lobster April 10, 2017 at 3:32 pm

Trespassing is.

(For reasons beyond my comprehension I find the urge to troll people on this incident irresistible).

25 Ckb April 10, 2017 at 8:06 pm

Of course it isn’t. What nonsense.

26 James Liu April 10, 2017 at 9:40 pm

Trespassing (without more) can’t possibly count as violence. if I invite you over to my house and you pay me a visit, but during that visit I decide that I desire for you to leave (and express that sentiment to you) you are trespassing. And that isn’t violence by any definition. And it’s a pretty close to what happened on that flight.

27 Paul April 10, 2017 at 4:12 pm

If we’re talking about the law, airlines are supposed to bump the offer up to at least a maximum of four times the fare one way or $1350.

So the agent could have gone to $1350. And the passenger has the right to a cash check if they want, but agents are trained to minimize informing passengers of their rights. Check out the DOT under involuntary bumping.

https://www.transportation.gov/airconsumer/fly-rights

28 mulp April 10, 2017 at 6:04 pm

Round trip fare is $203 so $400 is four times the fare, and the original ticket is still full value, including any fees and upgrades already paid, and can be cashed in or used on a future flight.

$800 was certainly well above the required compensation.

The problem is the last of the passengers were boarded even though they knew they were overbooked. Then after the incident, all passengers had to exit the plane, and then reboard an hour later.

29 rayward April 10, 2017 at 10:45 am

He really wanted out of Chicago. Is he a Keynesian?

30 A Black Man April 10, 2017 at 1:00 pm

They should have tasered him. That would have been great.

31 Enrique April 10, 2017 at 3:05 pm

Those cops dragging a paying passenger out of his seat are outrageous. Whatever happened to possession being 9/10ths of the law?

I guess United Airlines did not get the Julian Simon memo.

32 Kahless the Unforgettable April 10, 2017 at 9:51 am

Today is a good day to die!

33 mulp April 10, 2017 at 10:18 am

In other words, Simon made Acela service the luxury transportation mode between Boston, NYC, DC.

34 Ricardo April 10, 2017 at 10:23 am

That’s not quite a sick burn if you take CO2 emissions into account.

35 Jeff R April 10, 2017 at 10:47 am

The Acela is really only useful for real short trips, from what I can tell, like Boston-New York or New York-Philly. I live in Baltimore and looked into taking it to Boston one time. It wasn’t very cheap and the trip was going to take about 7 hours, if I recall correctly, with all the various stops. It’s an 80 minute flight from BWI to Boston.

36 prior_test2 April 10, 2017 at 12:03 pm

Flight time – the need to arrive early for various mandatory security checks not included.

37 Thor April 10, 2017 at 12:18 pm

Why doesn’t the next Julian Simon come up with some solutions to the problem of mandatory security checks?

Prior, I nominate you to do some deep thinking on the matter. You are ideal for the position. You are compassionate. You are highly intelligent (you were accepted into GMU). And you have time to regularly post insightful posts at MR.

So what could airlines do differently? The only solution I would not accept is the 70s Lufthansa practice of paying the PLO types tens of millions of dollars to not hijack their planes.

38 Jeff R April 10, 2017 at 12:30 pm

That’s why I said it was good for short trips, moron.

39 prior_test2 April 10, 2017 at 1:15 pm

I don’t need to do any deep thinking – airline passengers should just accept the risk of an airliner being blown up as the price of flying.

Oddly, the airlines and insurance industry don’t agree with this decades old perspective of mine.

‘You are compassionate. ‘

Far from it – back when I was attending GMU, I was an advocate for the idea that women should be able to shoot men without being charged, unless they were endangering others, along the lines of reckless discharge of firearms.

‘The only solution I would not accept is the 70s Lufthansa practice of paying the PLO types tens of millions of dollars to not hijack their planes.’

But since I’m American, I could care less what Lufthansa did – on the other hand, paying off DB Cooper was probably not a good idea. And let’s be honest – after the 1972 Munich Olympics incident (or massacre, considering that 11 Israelis died, along with one German police officer), it wasn’t as if anyone had all that much confidence in German security forces doing a good job protecting Israeli lives.

40 prior_test2 April 10, 2017 at 1:17 pm

The security checks take the same amount of time whether you are flying 50 or 500 or 5000 miles. No need to point that out to morons, right?

41 Bob from Ohio April 10, 2017 at 2:51 pm

“airline passengers should just accept the risk of an airliner being blown up as the price of flying”

There is no evidence that TSA has stopped a single bomb. Based on their poor success rate in tests, the lack of attacks is sheer luck.

42 Slocum April 10, 2017 at 4:06 pm

“Based on their poor success rate in tests, the lack of attacks is sheer luck.”

Nope. It’s based entirely on the lack of competent, willing terrorists in the U.S. Airport security theater (and stadium security theater) has create massive points of vulnerability — namely, the security checkpoints. Tow 100 lbs of high-explosives and shrapnel into the middle of a security line in a big roller bag and boom — dozens of casualties and no effective remedy (what are they going to do — set up a security line for the security line?)

43 whatever April 10, 2017 at 4:12 pm

@Prior Approval:

‘You are compassionate. [You are highly intelligent (you were accepted into GMU)]‘

Far from it

Don’t worry, you are not intelligent either.

44 Question April 10, 2017 at 11:01 am

Stupid question – why do airlines overbook flights? Why can’t they just sell 100% of the seats and then stop?

Is there a significant no-show rate that they’re trying to adjust for, similar to how colleges will over-admit students based on estimates of how many will actually accept?

45 Sam April 10, 2017 at 11:36 am

Significant enough to make it a worthwhile hedge. The no-shows can include people who change their itinerary a day or two before, for course. In the case of the United flight, apparently four United pilots needed to board in order to be reallocated, so in this case it doesn’t seem to be an example of customer over-booking.

46 Anon April 10, 2017 at 11:48 am

Many airline tickets are sold as refundable. When I travel for business I usually book a refundable ticket, and I often change the flight on which I originally have the seat. Airlines anticipate this and, instead of flying with an empty seat, they overbook expecting some cancellations/changes.

47 prior_test2 April 10, 2017 at 12:25 pm

They do now – but several decades ago, an experienced business traveller could clean up at the airline’s expense, as my father used to point out, referring to several times that the ‘auction’ kept increasing to ridiculous levels – think 1st class ticket for the next day, with the hotel room thrown in for free.

48 NatashaRostova April 10, 2017 at 12:22 pm

Let’s say a plan sells 200 tickets for 200 seats, and they do this for ten years.

After ten years you look at the data, and out of 10,000 flights, only a single time did all 200 passengers show up. Every other time at *least* 1 passenger was a no show.

So someone says “Hey, for a 200 seat flight we can sell 201 tickets, then 1/10,000 times all 200 show up, we pay one of them $X to defer their flight, and we come out with a huge net benefit!”

Now replace my made up numbers with actual statistical estimates, and you have your answer.

49 Question April 10, 2017 at 12:58 pm

Good answers, thanks, y’all!

50 Moo cow April 10, 2017 at 12:36 pm

I had an empty seat next to me SEA-LAS last week and I thought I had won the lottery. Sadly, that’s where my luck ended.

I remember the good old days, when I was one of a handful of people on one of the last Pan Am 747s. Not saying it’s better, but it was more comfortable.

51 BC April 10, 2017 at 12:57 pm

One can still get the same comfort today by buying two (or more) tickets. The fact that most people don’t do that means that they prefer crowded and cheaper to more comfortable and more expensive.

52 JWatts April 10, 2017 at 2:05 pm

“One can still get the same comfort today by buying two (or more) tickets. ”

Quite often you can get the same comfort for a lower monetary cost by booking the worst flight that’s going somewhere. A flight at an odd time will often have empty seats.Of course you might have to be at the airport before 5 am or fly in after midnight.

53 Bob from Ohio April 10, 2017 at 2:54 pm

Buying a second ticket is no guarantee. The airline can put a stand by on once the phantom passenger is a no show.

54 byomtov April 10, 2017 at 6:45 pm

Under some circumstances you can actually claim the seat.

I knew a cellist who bought an extra seat for his instrument to protect it. Maybe that’s no longer possible, or possible only for some reason like that.

55 Cooper April 10, 2017 at 2:17 pm

You paid for those empty seats with higher ticket prices.

People seem to forget how expensive air travel was during the “golden age” of flight in the 1960s.

56 Moo cow April 10, 2017 at 2:52 pm

Well, it was the end of the line for Pan Am (mid 80s iirc) and to raise cash they were flying 747s from Minneapolis to Chicago one way for $50 bucks. No reservations required.

57 byomtov April 10, 2017 at 6:46 pm

True.

still, every now and then you had the pleasure of having almost the entire airplane to yourself. I recall flights that had maybe five passengers on them.

58 mkt42 April 11, 2017 at 12:54 am

Flying on New Year’s Day helped. Even better was when I flew on Super Bowl Sunday. There were maybe 6 or 8 of us, sitting in the waiting area. One at a time the boarding agents called our names and asked us if we’d like to be moved into first class for free.

Nowadays I think the airlines would do what was probably the more profitable move all along, and simply cancel that flight and tell us to take the next one.

59 albatross April 10, 2017 at 3:39 pm

Giving companies police powers, or national-security-justified arbitrary power over their customers, turns out not to make them any more smart or wise or sensible. It just means that when they do something nasty or dumb, they’ll have lots of muscle on their side.

60 Daniel Weber April 10, 2017 at 5:49 pm

Anyone can call the police to remove a trespasser.

He had a ticket, but when the captain says to get off the plane, he has to get off.

The cops aren’t going to run a trial there on the plane to find out who’s right and who’s wrong. They are going to remove the person who needs removed and let a judge sort it out later. If the passenger decides they are going to drag him out, he’ll be right.

A bunch of stupid mistakes and escalation all around.

61 Larry Siegel April 11, 2017 at 2:21 am

Also, Chicago cops are not known for either their delicacy or their effectiveness. The airline called the cops, and the cops took over. Have you ever tried telling a cop, especially a Chicago airport cop who doesn’t see a lot of action, that he is overreacting and to cool it?

62 chuck martel April 10, 2017 at 7:15 pm

Maybe it’s not permitted by the airports or the FAA but why can’t an airline fly on heavily-traveled routes without schedules? For instance, why not have a plane sitting at a gate at O’hare bound for New York that won’t take off until it’s full? Passengers that want to go to New York simply get on the plane and when all the seats are occupied, it leaves. Then another plane takes its place. How long would it have to sit there?

63 Curt F. April 10, 2017 at 9:46 pm

I’m not sure you can call it an “auction” when the auctioneer and the seller are the same entity.

64 Jim April 10, 2017 at 11:19 pm

It seems like airlines have to much bargaining power, with “security” becoming an excuse to be abusive.
http://www.chicagotribune.com/business/ct-united-drags-passenger-0411-biz-20170410-story.html

65 bob April 11, 2017 at 9:45 pm

I agree that Julian Simon was a great economist. But airlines have long overbooked flights. The difference was at one time they would not offer any compensation for the passengers they kicked off. The chief impetus for the current rule was that some hapless airline booted Ralph Nader and gave no compensation. Nader took the airline to the Supreme Court and won the right of compensation. Perhaps the solution was inspired by the woks of Simon.

http://lawnewz.com/high-profile/united-cites-wrong-rule-for-illegally-de-boarding-passenger/

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