Suppose you are going to fly Delta from O’Hare to Atlanta.  You could buy a ticket now for price p or try to get a ticket later at the last minute.  After all, later on you will have a more accurate picture of your willingness to pay for the flight.  Luckily for you, Delta has adopted a bidding system where you can compensate another passenger who gets bumped to seat you.  How does the bidding procedure affect Delta’s incentives to overbook or underbook the flight?  How does it affect the initial price p?

First, there is some “marginal consumer” who is indifferent between paying p for the flight now or waiting and taking their chances in the bidding system.  Consumers with “higher” signals than the marginal consumer strictly prefer to buy at price p and are left with surplus. Consumers with “lower” signals strictly prefer to wait and take their chances.  Opening up the bidding system increases the value of the ticket to the marginal buyer: now he has the option of reselling it and capturing some of the rents from people who find they desperately need to go to Atlanta after all.  This extra rent is simply recaptured by the seller by raising the price p.  This has the additional benefit that more rent is extracted from consumers with higher signals.  Finally, to make the resale market active, Delta had better overbook the flight.

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