Monday, July 19, 2010

Game theory in airline promotion

Now note that I'm not talking about gaming theory - I'm talking about game theory, which is somewhat different. At least in my mind.

Companies offer incentives to employees and other companies all the time, but incentives need to be carefully designed. For example, some incentives can have detrimental side effects - if you promise to offer bonuses to people who stay at work the longest, sooner or later you're going to have cots in cubicles, wet towels in shower stalls, and probably a satellite TV subscription buried in the accounting records.

San Bernardino International Airport, despite its grand name, is still trying off the ground. Because of this, it decided to offer incentives to the first four airlines who initiated regular passenger service at the airport. I alluded to these incentives in a post I wrote last October. (I've also written about the airport at other times, including a detailed post in May 2010 and an "Empoprise-IE" rooster mention in June 2008.)

Unfortunately, the risks of starting business at a brand new airport had an unintended consequence regarding the incentive:

When San Bernardino International Airport offered incentives to the first four airlines that brought a schedule of flights with them, none wanted to be the first when they could be the third or fourth instead....

Yeah, let two other airlines take the risks, then march in and pocket the millions that the airport offers with minimized risk to yourself.

So the airport modified the offer:

Officials will now reward up to $2 million annually for two years and $1 million in startup and marketing costs to just the first two airlines to offer at least 12 flights a week.

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