United Airlines Flunks Economics 101 – Investor's Business Daily

Supply and Demand: After forcing a paying customer off a flight to make room for an employee, United Airlines is catching hell, and rightly so. But what’s really disturbing is that no one at United understood the most basic principle of free market economics.

The story goes like this. United overbooked a flight from Chicago to Louisville, Ky., on Sunday night. That’s hardly unusual. But in this case, United wanted to make room for four employees who needed to be in Louisville the next day, and the next flight to Louisville wasn’t until Monday afternoon.

According to news accounts, United offered passengers at the gate $400 and a hotel to give up their seats. But nobody took them up on it. After everyone had boarded the plane, United upped the offer to $800 for anyone willing to get off. Again, it got no takers.

So, the airline decided to do the “fair” thing and have a computer randomly pick four passengers, who were then told to get off the plane. When one refused, United called in cops. Another passenger recorded that man being yanked from his seat and dragged off the plane.

A high school student just learning about economics could explain what United did wrong.

Namely, it tried to ignore the supply and demand curve and the market clearing price.

Clearly, the combination of an overnight stay and the reason for being bumped (to accommodate United workers) pushed the market price for giving up a seat above $800.

United spokesman Charlie Hobart said the airline tries to come up with a reasonable compensation offer, but “there comes a point where you’re not going to get volunteers.”

That’s simply not true. Yes, United’s contract of carriage gives them the ability to bump passengers. But United could have — and given the circumstances should have — continued to increase its offer price until it got enough volunteers. At some point, there would have been a rush to give up seats.

The result: Everyone would have gone away happy. The passengers who agreed to get off the flight would have received something they valued more than arriving on time, and United would have been able to get its own employees where they needed to be without raising a fuss.

Instead, United tried to impose its own form of price controls and then have the police enforce its nonmarket decision.

Does that sound familiar to anyone?

It should, because this is precisely what happens when government interferes in any market, either by forcing prices higher or lower, or mandating businesses offer this or that, to accommodate some other alleged social goal — and then forcing everyone to abide by these rules. The result is economic inefficiency, rising animosity and a growing police state.

Price controls are why there were gasoline shortages in the 1970s and doctor shortages in Medicaid today. They explain why the individual insurance markets are failing under ObamaCare, and why Venezuelan grocery store shelves are empty.

Such economic illiteracy might be excusable among government regulators and bureaucrats who make their living telling other people what to do. But the fact that a private company — in an industry that is constantly changing ticket prices to meet even slight changes in demand — didn’t understand this basic economic principle is really troubling.

Then again, it was the airlines themselves that fought to keep the government in charge of setting their routes and fares when Congress decided to deregulate the industry in the 1970s.


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