Question

1. Suppose there is a business-class seat available on an airline flight two days before the scheduled departure. The fare for the seat is $2,000. Using a service that allows bidding on tickets, a customer offers the airline $700 for the ticket. The airline can accept the offer or decline it and try to sell the ticket for the full fare. Based on past history, the airline knows that it has a 20 percent chance of selling the ticket the next day (the day before the flight). If it doesn't sell the ticket, the airline can either (1) sell it to a ticket discounter for $250 or (2) try to sell the ticket on the day of the flight. Data for previous flights show there is only a 10 percent chance of selling the ticket on the day of the flight, but also a 20 percent chance that the seat can be used to accommodate the overbooking of economy class tickets, which sell for $500. Otherwise, the seat will go empty. Assuming the airline is risk neutral, should it accept the original offer of $700 two days before the flight?

Answer 1

Yes,It should accept the offer of $700 two days before the flight because

1. It has only 20 percent chance of seeling the ticket the day before flight.

2. It has only 10 percent chance of selling the ticket on the date of ticket.

3. It has 20 percent chance that the seat can be used to accommodate the overbooking of economy class tickets,which sell for $500.

Otherwise the seat will go empty.