Question: United Airlines violently removed a passenger all due to an overfilled flight

When I was in college majoring in economics, game theory was sexy (as much as it can be). The movie A Beautiful Mind had made a superstar of John Nash (even though the movie got his equilibrium theory wrong) jobs were popping as it was just before the dot-com bust, CDO break down, energy crisis, and Michael Lewis’s Moneyball. Game theory is the probability scenario that guides strategy to certain “games” or events. The biggest application of this was to the 1960s with MAD (mutually assured destruction) between NATO and the USSR. In fact, Stanley Kubrick’s Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, is all about tit-for-tat game theory. (I’d require we’d watch it if we had time.)

Now, in 2017, United Airlines violently removed a passenger all due to an overfilled flight. The business lessons from this case are near limitless, but how do airlines stop these situations to begin with? There’s a lot of sociology going on with endowment effects and lose aversion. Well, game theory may have an answer.

Give us your opinion or ideas on how to handle the situation better if you work for an airline. How do you fix the situation of filling a flight and not losing money on vouchers, going viral on YouTube with muscling passengers around, and using some game theory out of Chapter 10 to help? The thought analysis is not unlike many other real life scenarios, so it’s good practice.

DRAFT/STUDY TIPS

Introduction

In the realm of economics and strategic decision-making, game theory stands as a pivotal analytical tool, offering insights into human behavior in competitive situations where the outcomes depend on the choices of all involved participants. This essay delves into the application of game theory to a real-world scenario: the infamous 2017 United Airlines incident, where a passenger was forcibly removed from an overbooked flight. This event not only ignited public outrage but also highlighted the delicate balance airlines must maintain between operational efficiency and customer satisfaction. Through the lens of game theory, specifically focusing on strategies like the Nash equilibrium, mixed strategies, and tit-for-tat, this essay explores how airlines can manage overbooking scenarios more effectively, minimizing financial losses and avoiding public relations disasters.

The United Airlines Incident: A Brief Overview

In April 2017, United Airlines faced severe backlash after a passenger, Dr. David Dao, was forcibly removed from an overbooked flight to accommodate airline employees. The incident, captured on video, went viral, sparking widespread condemnation and raising questions about the ethical and business practices of airlines. Overbooking, a common practice in the airline industry, relies on the assumption that some passengers will not show up for their flights, allowing airlines to sell more tickets than available seats. However, when all passengers do show up, airlines must incentivize volunteers to give up their seats, typically through vouchers or cash offers. In the United Airlines case, when no passengers volunteered, the situation escalated, leading to the violent removal of Dr. Dao.

Game Theory and the Airline Industry

Game theory, a branch of mathematics and economics, studies strategic interactions where the outcome for each participant depends on the actions of others. In the context of the airline industry, game theory can be applied to understand and predict passenger behavior, particularly in overbooking scenarios. The key concepts of game theory, such as the Nash equilibrium and mixed strategies, offer valuable insights into how airlines can design better incentives and avoid conflicts like the one witnessed in 2017.

Nash Equilibrium and Overbooking

The Nash equilibrium, a fundamental concept in game theory, occurs when all players in a game choose the best possible strategy given the strategies of others, resulting in no player having an incentive to deviate unilaterally. In the case of overbooking, the airline and passengers are the primary players. The airline's goal is to maximize profits by filling every seat, while passengers aim to reach their destinations without inconvenience. The Nash equilibrium in this scenario would involve a situation where both the airline and passengers are satisfied with the outcome, and no party has a reason to change their behavior.

To achieve this equilibrium, airlines could implement a pre-emptive bidding system, where passengers are informed of the possibility of overbooking during the booking process. They could then be asked to indicate the minimum compensation they would accept to voluntarily give up their seat if necessary. This approach allows the airline to identify passengers who are more willing to accommodate changes, thus avoiding last-minute conflicts and ensuring that the compensation offered is sufficient to encourage voluntary rebooking. This system could prevent situations like the United Airlines incident by creating a more transparent and mutually beneficial agreement between the airline and passengers.

Mixed Strategies and Passenger Incentives

Mixed strategies in game theory involve players randomizing their choices to keep opponents uncertain about their next move. In the context of overbooking, airlines could use mixed strategies to vary their compensation offers, making them unpredictable. This could encourage passengers to volunteer more readily, as they might perceive a higher likelihood of receiving a favorable offer. For example, instead of offering a fixed amount, the airline could use a random range for compensation, increasing the potential reward with each iteration until enough volunteers come forward.

This approach aligns with the concept of "loss aversion" in behavioral economics, where individuals are more motivated to avoid losses than to acquire equivalent gains. By framing the compensation as a potential gain that increases over time, airlines could leverage passengers' loss aversion tendencies to encourage voluntary seat relinquishment. This strategy not only prevents conflict but also enhances the overall passenger experience, as those who voluntarily give up their seats do so with a sense of satisfaction rather than resentment.

The Endowment Effect and Loss Aversion

In addition to game theory, concepts from behavioral economics, such as the endowment effect and loss aversion, play a crucial role in understanding passenger behavior. The endowment effect refers to the tendency of individuals to value an item more highly simply because they own it. In the context of overbooking, passengers who have already boarded a flight or secured their seat may place a higher value on their seat than the compensation offered, making them less likely to volunteer.

To counteract the endowment effect, airlines could enhance the perceived value of the compensation by offering more personalized incentives. For instance, instead of generic vouchers, airlines could offer tailored benefits such as upgrades on future flights, access to premium lounges, or additional frequent flyer miles. By aligning the compensation with passengers' preferences, airlines can increase the likelihood of voluntary seat relinquishment, thereby avoiding the need for forceful removals.

Loss aversion, the psychological phenomenon where people prefer to avoid losses rather than acquire equivalent gains, also influences passenger decisions. When passengers perceive giving up their seat as a loss, they are less likely to volunteer. However, by reframing the situation as an opportunity to gain something valuable (e.g., a better travel experience in the future), airlines can mitigate loss aversion and encourage more passengers to volunteer.

Tit-for-Tat Strategy and Building Trust

The tit-for-tat strategy, popularized by the iterated prisoner's dilemma in game theory, involves players reciprocating their opponents' actions, whether cooperative or competitive. In the airline industry, a tit-for-tat approach could be used to build trust and foster long-term relationships with passengers. For example, airlines could implement a policy where passengers who voluntarily give up their seats receive preferential treatment in future situations, such as priority boarding, complimentary upgrades, or additional loyalty points. By rewarding cooperative behavior, airlines can create a culture of trust and goodwill, reducing the likelihood of confrontations.

Moreover, airlines could use tit-for-tat strategies to enhance their public image. In the aftermath of incidents like the United Airlines case, airlines can publicly acknowledge their mistakes and implement customer-friendly policies as a form of restitution. By demonstrating a commitment to treating passengers fairly and transparently, airlines can rebuild trust and avoid the negative publicity that accompanies such incidents.

Applying Game Theory to Airline Policies

To further illustrate the application of game theory to airline policies, consider the following hypothetical scenario:

An airline regularly overbooks its flights, knowing that a small percentage of passengers will not show up. However, on a particular flight, all passengers arrive, and the airline needs to free up seats for its employees. Instead of relying on force or last-minute negotiations, the airline could implement a tiered bidding system during the check-in process. Passengers who check in early would be informed of the potential for overbooking and given the option to place a bid indicating the compensation they would accept to voluntarily give up their seat. As the check-in process continues, the airline could adjust its offers based on the number of bids received and the urgency of the situation.

This approach aligns with the concept of backward induction in game theory, where players anticipate the endgame and adjust their strategies accordingly. By starting the bidding process early and gradually increasing the compensation offers, the airline can maximize its chances of securing enough volunteers without resorting to force. Additionally, the airline could use data from previous flights to predict passenger behavior and optimize its bidding strategy, further enhancing the effectiveness of this approach.

Addressing the Potential Drawbacks of Game Theory in Practice

While game theory offers valuable insights for managing overbooking scenarios, it is essential to acknowledge its limitations and potential drawbacks. One challenge is the assumption that all players (in this case, passengers) are rational and will always act in their best interest. In reality, human behavior is often influenced by emotions, biases, and social factors that may not align with purely rational decision-making.

Moreover, implementing game theory-based strategies requires careful consideration of the ethical implications. For example, while offering higher compensation to incentivize volunteers may be effective, it could also be perceived as exploitative or manipulative, particularly if passengers feel pressured to give up their seats. Therefore, airlines must strike a balance between using game theory to optimize outcomes and maintaining ethical standards that prioritize passenger well-being.

Conclusion

The United Airlines incident serves as a stark reminder of the challenges airlines face in managing overbooking situations while maintaining customer satisfaction and avoiding negative publicity. By applying game theory principles such as the Nash equilibrium, mixed strategies, and tit-for-tat, airlines can design more effective and ethical policies that prevent conflicts and enhance the passenger experience. Additionally, incorporating insights from behavioral economics, such as the endowment effect and loss aversion, can further improve the effectiveness of these strategies. Ultimately, while game theory provides a powerful framework for understanding and addressing these challenges, airlines must also consider the broader ethical implications and strive to build trust and goodwill with their customers.