> It's a little more complex than this. It's highly feasible to offer compensation higher than than the original purchase price of the ticket while inducing passengers to move to a different flight, meaning they're effectively being "paid to fly".
> In many cases, customers are actually not on their preferred flight in the first place, but merely the one that was cost-optimal at time of purchase.
You misunderstood.
The original purchase is no longer relevant. The airline and the passenger are now in a new game. In this new game, the passenger has a reservation price. Your goal is to estimate that accurately to transfer all surplus from rebooking to the airline and to another passenger.
The passenger is not harmed by this per se. They are indifferent between taking this flight vs taking the compensation and flying on another.
However, in the real world, people don't really like being driven to their reservation prices in your quest to assign all surplus from this new transaction to the airline and a third party.
This is not a new idea. Priceline comes to mind.
You could have chosen to work on a decent auction application for this purpose. Instead, you choose to collect data that is unnecessary to solving the actual "overbooking problem", but has the benefit not leaving any surplus from the rebooking transaction to the passenger.
Part of the issue they are trying to solve is that the optimal pricing problem is overlaid with a currency exchange problem. Airlines can compensate customers with vouchers, upgrades, cash or frequent flier miles; as well as different commitments for rebooking. Each customer is going to have a different value for each of these axes. Learning about passenger preferences will help airlines to make offers that are most appealing to individual passengers.
Ultimately, operating a rebooking system near the Nash equilibrium is great for everyone. People who really need to get from A to B on time have a higher chance of doing so, people who are flexible can trade that flexibility for compensation, and the airlines can operate at higher capacity and sell more high-dollar last-minute seats.
> In many cases, customers are actually not on their preferred flight in the first place, but merely the one that was cost-optimal at time of purchase.
You misunderstood.
The original purchase is no longer relevant. The airline and the passenger are now in a new game. In this new game, the passenger has a reservation price. Your goal is to estimate that accurately to transfer all surplus from rebooking to the airline and to another passenger.
The passenger is not harmed by this per se. They are indifferent between taking this flight vs taking the compensation and flying on another.
However, in the real world, people don't really like being driven to their reservation prices in your quest to assign all surplus from this new transaction to the airline and a third party.
This is not a new idea. Priceline comes to mind.
You could have chosen to work on a decent auction application for this purpose. Instead, you choose to collect data that is unnecessary to solving the actual "overbooking problem", but has the benefit not leaving any surplus from the rebooking transaction to the passenger.
PS: Just as a side note, I tend to be very understanding when things go wrong when I fly: http://www.flyertalk.com/the-tarmac/the-2013-tarmac-awards.h...