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February 17th, 2006 - Open Knowledge

Feb. 17th, 2006

02:39 pm - Reverse dutch auctions to solve NIMBYism


Julian's Genius Font Size:

By Herbert Inhaber : BIO | 22 Aug 2003

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A recent article on auctions in the science journal Nature sparked memories of my interactions with the late Julian Simon, the famed economist at the University of Maryland.

David Porter of George Mason University in Virginia found ways to make auctions more efficient. Auctions are generally efficient since they help match supply and demand. But bidders can employ confusing strategies like spreading the price they want to pay among more than one item. Porters scheme, involving a clock ticking upwards, might solve these problems.

Julian Simon was a proponent of auctions, but not the Saturday morning farmyard kind. I had the honor of knowing Julian and at one time we were planning to co-edit a book dealing with auctions and other money-based ways of solving societal problems.

Julian was the developer of one of the best known auctions there is, even if most people dont realize it. The auction Julian designed is used to get excess passengers off overbooked airlines. As an economist, he developed an interest in this when he found out that stewardesses were putting elderly people off overbooked planes, on the assumption that they would complain less than younger ones. He had some memos from airline executives stating this policy.

He realized that some type of financial compensation to booted passengers was necessary, but how to arrange it? He came up with what I later called the reverse Dutch auction, although he never used the term. The standard auction is known to economists as the English auction. Bids rise until there is only one bidder left, but such an auction would take far too long with an airliner at the gate.

The Dutch auction works in reverse. The auctioneer starts the auction at a high price. The price gradually drops until a bidder raises his hand. There is only one bid.

But the Dutch and English auctions are for desirable objects. Since being put off an airplane is clearly not desirable, the process must be reversed.

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