Comment by nanis | Hacker News Reader

Comment by nanis | Hacker News Reader

The title is a polite way of putting it. In reality, what they are backing is a startup which claims that the data they gather will allow airlines to gobble all consumer surplus by being able to offer compensation equal to the reservation price of the customer: I.e., the compensation that leaves the passenger indifferent between flying on this flight vs giving up their seat.

I am going to claim that the airlines backing this and the investors of the startup have not studied Ultimatum Games[1]:

    One of the most debated results in experimental
    economics comes from studies of the so-called
    “ultimatum” game. In this game, one player (the
    “proposer”) goes first and offers a split of a pie
    of given size. The second player chooses whether to
    accept or reject. If the second player rejects, both
    get noting. If he accepts, they split the pie as was
    proposed. The ultimatum game has a unique subgame
    perfect equilibrium where the proposer gets
    (essentially) the whole pie. It also has many other
    Nash equilibria, where the proposer offers a more
    generous split, fearing an aggressive offer will be
    rejected.

    The experimental results are in stark contrast to
    the backward induction solution.

[1]: https://web.stanford.edu/~jdlevin/Econ%20286/Experimental.pd...

The game theory is indeed complex.

> offer compensation equal to the reservation price of the customer

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.

Changes in market demand in the intervening 3-6 months can easily mean that many passengers on an aircraft can be compensated above their original purchase value to move to their preferred flight.

The above case is an idealised version, but the equilibria is complex and difficult to intuit without experimentation (which is primarily what we're working on).

More news as it happens :)

Sameless self-promotion (I'm cofounder/CTO): We're also hiring (https://angel.co/volantio/jobs / https://www.workatastartup.com/directory/270)

> 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.

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...

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.

This reminds me of a flight I booked about 3/4 a year ago from SF to DC - I had a suboptimal layover in Houston, which was rerouted to be a layover in Chicago after the hurricane triggered changes to my routing. Unfortunately for the airline, it then had to deal with a situation where they overbooked by 10 people.

I was offered a first class seat on a direct flight + $600 to switch, which I happily accepted. In truth, I would’ve been happy with just any seat on that direct flight.

> I would’ve been happy with just any seat on that direct flight.

And, the goal of the Volantio is to collect data on you so that the airline never over-compensates you. That is, all the benefits from the rebooking transaction accrues to the airline.

Imagine every time you went to buy a coffee, the coffee shop charged you exactly how much you value the next cup of coffee.

Probably an issue, but I'm wary of concluding it would be the dominant factor in such a complex situation.

Passengers will probably also guess that offers are being extended to others on the same flight, and they may feel they need to accept the offer ASAP if they don't want to lose it. Psychologically, limited time offers are powerful. (Maybe powerful enough for passengers to let themselves off the hook on greed punishment, if that is the underlying factor in the Ultimatum Game.)

Or maybe we can just say that Nash equilibrium doesn't apply here? A Nash equilibrium requires all players to know all other players' decisions/strategies, and in this game the passenger does know the airline's decision and their own decision, but they are in competition with other passengers whose decisions they don't know.

As an aside, some have proposed a mechanism derived from this method as a way to fix congressional redistricting.

That is an interesting and vexing problem and it's not clear to me how this applies. Could you post a link with more details?

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