May 13, 2011
Decision Theory and Slot Auctions
Blog readers may be interested in James Bono & David Wolpert's Decision-Theoretic Prediction and Policy Design of GDP Slot Auctions (Working Paper, Mar. 23, 2011) (available from SSRN here). From the abstract:
We examine the potential for a simple auction to more efficiently allocate arrival and departure slots during Ground Delay Programs (GDP's) than the currently used system. The analysis of these auctions uses Predictive Game Theory (PGT) Wolpert and Bono (2010a,b), a new approach that produces a probability distribution over strategies instead of an equilibrium set. We compare the simple auction with other allocation methods, including combinatorial auctions, and theoretical benchmarks using data from a one-hour GDP at Chicago Midway. We find that the simple slot auction overcomes several practical shortcomings of other approaches, while offering economically significant efficiency gains with respect to current practices and the potential to lower airline costs. We also find that the second price version of the simple auction dominates the first price version in nearly every decision-relevant category. This is despite the fact that none of the conventional arguments for second price auctions, such as dominant strategy implementability, even apply to GDP slot auctions. Finally, the results indicate that combinatorial auctions, if made operationally practical, might be more efficient than our auction, even though the combinatorial auction does not implement the social optimum in dominant strategies.
May 12, 2011
Bags Fly Free
Blog readers interested in the commercial success of Southwest Airlines may want to read Rachel Ang's working paper, Low Cost Carrier with Bags Fly Free (Apr. 13, 2011) (available from SSRN here). From the abstract:
Southwest airline is recognized in the United States as one of the most important and influential airline organization in corporate America. This study examines how Southwest uses the competitive marketing strategies and market performances - “Low Cost Carrier with Bags Fly Free” to assist customer relationship marketing, Customer Lifetime Value (CLV). Based on 108 findings of the in-depth interviews, many recommendations can be derived for Southwest, the most powerful multichannel aviation carrier in the Unites States of America. The philosophy of “Low Cost Carrier” has driven customer retention and commitment for past two decades. With consumers shopping around for best prices, will “Bags Fly Free” continue to support Southwest for permanent growth in market share and development.
May 11, 2011
Cabotage has become a topic of discussion again among aviation law aficionados, particularly with regard to whether or not the doctrine applies to non-remunerative carriage. As a number of commentators have noted, the application of the doctrine varies considerably from country to country. For instance, under 49 U.S.C. § 40109(g), the Department of Transportation "may exempt by order a foreign air carrier . . . for not more than 30 days to allow the foreign air carrier to carry passengers or cargo in interstate [i.e., domestic] air transportation in certain markets" if the Department determines that such authorization is in the public interest due to an "emergency created by unusual circumstances not arising in the normal course of business[.]" This seems to imply that any domestic carriage of passengers or cargo, regardless of remuneration, is barred under U.S. law unless granted special dispensation by the DOT. However, the Department's webpage, "Airline Cabotage," adds the qualification that these limited cabotage rights apply to "commercial traffic." It is not clear whether the "commercial traffic" language constitutes a gloss on the provision, an iteration of DOT practice in these matters, or a simple confusion concerning the actual language of the statute. Interestingly, the word "cabotage" itself has never appeared in U.S. law. See generally Nicky E. Hesse, Some Questions on Aviation Cabotage, 1 McGill L.J. 129, 133 (1953); see also 49 U.S.C. passim.
Arguably, the DOT's interpretation that "cabotage" means "commercial traffic" is the most sensible approach in light of the doctrine's "canonical" definition under the Chicago Convention: "Each contracting State shall have the right to refuse permission to the aircraft of other contracting States to take on its territory passengers, mail and cargo carried for remuneration or hire and destined for another point within its territory." See Convention on International Civil Aviation art 7., opened for signature Dec. 7, 1944, 61 Stat. 1180. Besides, an overly strict reading of the cabotage prohibition in U.S. law would imply that British Airways, for example, would be barred from enplaning its own employees for courtesy carriage during a stopover in New York on a London/Los Angeles flight.
For further discussion of the history of cabotage, see Pablo Mendes de Leon, Cabotage in Air Transport Regulation (1981).