How do passengers react to airlines’ overbooking strategies? Evidence from the US airlines

Abstract

Abstract We examine how passengers react to carriers’ various overbooking strategies by exploiting the fact that in 2011, Delta launched a bidding system that encourages passengers on an overbooked flight to give up their reserved seats voluntarily. To examine whether Delta’s bidding system is effective in increasing (reducing) the number of passengers being voluntarily (involuntarily) bumped, we estimate the changes in the number of denied boardings for Delta and other carriers before and after Delta started its bidding system. To address endogeneity and minimize omitted variable bias, we employ two-step fixed effects Poisson regression models for estimation. The estimation results suggest that Delta’s bidding system seems to work as an effective seat inventory management technique that provides an incentive for potential holdouts to give up their reserved seats voluntarily. As a result, the bidding system is supposed to keep the number of voluntarily bumped passengers from decreasing. Delta’s bidding system seems to effectively keep the number of volunteers relatively constant and, more important, reduce the number of involuntarily bumped passengers.