You Tell Us What Your Seat Is Worth
Who hasn’t heard an airline gate attendant announce, “We are in an overbooked situation and are offering $xxx to anyone willing to give up a seat and take a later flight?”
The problem with this announcement for the airlines is that there is often a rush of people supplying seats — the $xxx is above equilibrium, and the airline is offering some volunteers a substantial consumer surplus.
Northwest Airlines has found a way to circumvent this: When you check in online, the website states that the flight is very full and they are accepting volunteers to give up seats. If you click “yes” to indicate your interest, it then ask how much money you want as compensation. It notes clearly that they will take the lowest offered prices first. If it needs 10 volunteers, Northwest could offer each the tenth-lowest price offered, reducing consumer surplus, and saving itself money compared to the gate announcement.
But why not go whole-hog: Give each of the volunteers exactly what she/he offered, thus entirely wiping out consumer surplus. I bet they do that.
This is a rare example of perfect price discrimination, and it wouldn’t have been possible without the internet.