TCS Daily

Julian's Genius

By Herbert Inhaber - August 22, 2003 12:00 AM

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. Porter's 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 don't 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.

Anyone who has ever flown has seen it in action. The announcement of overbooking is made, and the attendants offer a free ticket to those who depart. Usually, enough people rush forward that the overbooking is relieved within a minute. The attendants have the ability to offer free tickets, hundreds of dollars and other incentives if they can't get enough people to deplane. So the process is truly an auction, and works highly efficiently.

Julian went to airline executives, suggesting this as a method for solving their difficulty. But they rejected his idea, partly because they didn't think of it themselves. He had almost given up when he encountered Dr. Crandall, an economist at the Brookings Institution. Crandall was the son of Robert Crandall, then the head of American Airlines. The elder Crandall was very skeptical of Simon's idea, but agreed to give it a short trial. It worked perfectly, and is of course now universally adopted -- a prime example that sometimes it's not what you know, but who you know.

The reverse Dutch auction can also be applied to siting LULUs - Locally Unwanted Land Uses. This is the common situation where everyone wants a place to house things like dangerous criminals, hazardous and nuclear waste, as long as it's not in their backyard.

The siting authority would set some fair environmental rules -- no putting wastes in swamps or Times Square. Then the price would rise, every week or month. The rising price, as in the airline case, would create a constituency urging their elected leaders to bid now, before the county down the road or the adjacent state got all the money.

Right now, there is absolutely no constituency to accept LULUs anywhere, with the result that risks of storing wastes are increased unnecessarily. Living in Las Vegas, not far from the proposed Yucca Mountain repository, I know that there are few in Nevada that welcome it with open arms. If there had been a reverse Dutch auction, there might be people in Nevada (or any other state with deserts, like New Mexico or Washington) who would want it to come there.

Julian Simon, as many readers of TCS know, was a great believer in the power of ideas to change society for the better. His ideas still live on -- and may they continue to do so.

The writer is author of "Slaying The NIMBY Dragon."


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