Dealing with Risk, Asymmetric Information, and Incentive

Assignment: Dealing with Risk, Asymmetric Information, and IncentivesDue Week 9 and worth 310 pointsEarlier in the quarter we discussed Southwest Airlinesâ?? use of game theory to create new strategy. Continue to research Southwest Airlines and write a six (6) page paper in which you:Evaluate a companyâ??s recent (with in the last year) actions dealing with risk and uncertainty.Offer advice for improving risk management.Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.Examine the organizational structure of your company and suggests ways it can be changed to improve the overall profitability.Use at least five (5) quality academic resources in this assignment. Note: One of your references regarding your should have been published within the last 6 months. Note: Wikipedia does not qualify as an academic resource.Your assignment must follow these formatting requirements:Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.Include a cover page containing the title of the assignment, the studentâ??s name, the professorâ??s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
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Running head: CHANGE IN SOUTHWEST AIRLINES
Change in Southwest Airlines
Cheryta McKoy
Instructor Name: Dr. Chebe, Emmanuel N.
Course: Economics 550
May 19, 2018
CHANGE IN SOUTHWEST AIRLINES
2
Southwest airline is an American air transport provider which has its headquarter in
Dallas, Texas. It mostly operates on flights to Mexico, Latin America and the Caribbean. In
the past few years, it has had some few changes on their plane boarding procedure that has
positively impacted on the efficiency of their service delivery. Before, the used the â??open
seating’ method where a traveller occupies any seat and the rule of â??first come, first servedâ??
was one of the main characteristics. This procedure led to very many negative issues
including people camping outside the gates to be the first to acquire better seats when the
boarding time is due. Many customers who were unable to compete with others due to lack of
strength especially the aged, had to wait and occupy the seats that remain after others have
occupied the best. This struggle could also lead to separation of families or friends in terms of
sitting positions(Shefrin. 2018). By considering such situations, they opted to transform the
face of their seat allocation procedure. They came up with a way in which travellers are
assigned letters especially A, B and C which was based on the time a traveller checked in for
the flight. This means they had to go online for this check-in. Based on this platform, those
who check earlier are assigned letter A followed by B and finally C in consideration of the
time difference. Even though they assigned these letters, they still did not assign seats, and
travellers who get into the plane first would have the whole time to choose the best seats, and
still, those with lower letters like C will have no option but to occupy the left seats.
Another alternative procedure which they launched around 2009 was the â??Early-bird
check-in’, whose main purpose was to realise a great profit vested from the travellers added
amount. The third-party companies which charged $1 to help the travellers check in their
flights were banned by the Southwest Airlines so that they could pick up the business and
started charging $10 extra on a traveller per one way flight to help them book seats and do the
online flight check-in. Because many business-oriented travellers are so busy to appear and
book their seats physically, this game became very successful through the ten dollars that
CHANGE IN SOUTHWEST AIRLINES
3
were charged per one way journey per traveller. Another reason why this game was so
successful was the fact that competition was automatically introduced in the form of
customers’ conscience. Customer A has a strong feeling that upon payment of the $10 he/she
is automatically assigned a good seat. This is the same thing that customer B and others are
thinking of and they would reason that if they delay, the best seats would be taken by others
and so they give the amount as fast as possible. This means they are competing for a seat
lottery.
This game theory from when it was started, has got the Southwest Airlines into
generating much profit. There has been recorded a tremendous increase in profits which are
much higher above what was expected. This is mainly between the years 2010 and 2011. In
2010 as per the statistics, it is recorded that this company made a profit of $98 million. This
amount got a very high increase of about 44% in the year 2011 to make the profit reach up to
$142 million, thanks to the seat lottery game(Talwalkar. 2013). The other outcome of this
game is just the fact that many people have been addicted to it with the notion that without
using the $10, they automatically get poor seats. The problem is that the Southwest Airlines
cannot allocate good seats to everybody especially when many people pay this amount. This
situation brought the issue of the company admitting that payment of the $10 does not
necessarily mean that a customer will be guaranteed better seats, but still it remains to be
what is referred to as â??prisoner’s dilemma’ in flight. A person cannot just stop paying for the
seat booking. Even though the fact exists that at times many customers pay in the â??lotteryâ??
and get pissed off after being assigned poor seats, many of them have resolved to pay for it as
their dominant strategy. They already know that even if they do not pay for the early-bird
check-in, many other customers will pay and the company will make their profits as usual.
This means that the company will continue making profits for many other years to come as
many customers will never stop gambling for the best seats.
CHANGE IN SOUTHWEST AIRLINES
4
Customers here prominently experience what is known as prisonerâ??s dilemma. This
exists especially when they have to get involved in a lottery competition for seats against
themselves such that even after realising that nothing can change when all of them play the
game, they find themselves in a situation where they cannot just stop playing it as the
competition tightens and most of the time priority of seat occupation is guaranteed.
The game as it is played has both the negative and positive implications either to the
customers or the Southwest Airline Company. Some of the advantages to the customer
include the fact that they will have their seats reserved especially when the booking is made
around 36 hours before the real flight time. This then increases their confidence in the game
and therefore almost always find themselves involved in it. The check-in has also made it
easy for customers to access their flight pass 24 hours before the departure time. You click in
to check in and then access the pass, so you be able to print it. Due to a large number of
customers paying the $10 in the early bird check in, the good seats are not guaranteed but
still, it has an advantage in the improvement of seat selection, and this increases customers’
comfort while travelling (Thomas. 2018). One great advantage of this game to the company is
that it has boosted the companyâ??s profit generation mechanism that has greatly helped in the
maintenance issues which concerns its services.
All that which have advantages most of the time also have disadvantages. Some of the
disadvantages of this game include the fact that many customers pay for the check-in; thus
the best seats are not guaranteed to all those who pay. This means some people who pay will
still get B and C seats. Another disadvantage to the customer is the fact that no particular
seats are allocated even upon payment, and so a customer has to come and struggle with
others who also paid in the quest for better seats. Family members boarding and sitting next
to each other is almost impossible. This is because of the difficulty in getting many seats at
once, lack of seat allocation and differences in check in times due to competitions.
CHANGE IN SOUTHWEST AIRLINES
This is a perfect way of making profits which other companies should copy and
transform in their ways to help them realise enormous profits. A good way in which a
company, for example, which deals with furniture can realise greater profits is to jointly sell
their goods at a relatively higher price than when they were sold singly; a sofa set, a bed and
a table sold jointly at relatively higher prices than selling them singly. Another way could be
to redesign the company’s workflow strategies for example in replacing human labour with a
computer and then clients are made to pay for the computer services. This means they do not
have to present themselves to the company physically.
5
CHANGE IN SOUTHWEST AIRLINES
6
References
Shefrin, H. (2018). Information Sharing Failures at Southwest Airlines, General Motors, and
the Agencies That Regulate them. Behavioural Risk Management, 319-334.
doi:10.1057/9781137445629_19
Talwalkar, P. (2013). Information Sharing Failures at Southwest Airlines, General Motors,
and the Agencies That Regulate them. Boarding and Game Theory.
doi:10.1057/9781137445629_19
Thomas, M. (2018). Strategic principles at Southwest Airlines. Strategic Direction, 31(8), 1012. doi:10.1108/sd-03-2015-0047
Running head: CHANGE IN SOUTHWEST AIRLINES
Change in Southwest Airlines
Cheryta McKoy
Instructor Name: Dr. Chebe, Emmanuel N.
Course: Economics 550
May 19, 2018
CHANGE IN SOUTHWEST AIRLINES
2
Southwest airline is an American air transport provider which has its headquarter in
Dallas, Texas. It mostly operates on flights to Mexico, Latin America and the Caribbean. In
the past few years, it has had some few changes on their plane boarding procedure that has
positively impacted on the efficiency of their service delivery. Before, the used the â??open
seating’ method where a traveller occupies any seat and the rule of â??first come, first servedâ??
was one of the main characteristics. This procedure led to very many negative issues
including people camping outside the gates to be the first to acquire better seats when the
boarding time is due. Many customers who were unable to compete with others due to lack of
strength especially the aged, had to wait and occupy the seats that remain after others have
occupied the best. This struggle could also lead to separation of families or friends in terms of
sitting positions(Shefrin. 2018). By considering such situations, they opted to transform the
face of their seat allocation procedure. They came up with a way in which travellers are
assigned letters especially A, B and C which was based on the time a traveller checked in for
the flight. This means they had to go online for this check-in. Based on this platform, those
who check earlier are assigned letter A followed by B and finally C in consideration of the
time difference. Even though they assigned these letters, they still did not assign seats, and
travellers who get into the plane first would have the whole time to choose the best seats, and
still, those with lower letters like C will have no option but to occupy the left seats.
Another alternative procedure which they launched around 2009 was the â??Early-bird
check-in’, whose main purpose was to realise a great profit vested from the travellers added
amount. The third-party companies which charged $1 to help the travellers check in their
flights were banned by the Southwest Airlines so that they could pick up the business and
started charging $10 extra on a traveller per one way flight to help them book seats and do the
online flight check-in. Because many business-oriented travellers are so busy to appear and
book their seats physically, this game became very successful through the ten dollars that
CHANGE IN SOUTHWEST AIRLINES
3
were charged per one way journey per traveller. Another reason why this game was so
successful was the fact that competition was automatically introduced in the form of
customers’ conscience. Customer A has a strong feeling that upon payment of the $10 he/she
is automatically assigned a good seat. This is the same thing that customer B and others are
thinking of and they would reason that if they delay, the best seats would be taken by others
and so they give the amount as fast as possible. This means they are competing for a seat
lottery.
This game theory from when it was started, has got the Southwest Airlines into
generating much profit. There has been recorded a tremendous increase in profits which are
much higher above what was expected. This is mainly between the years 2010 and 2011. In
2010 as per the statistics, it is recorded that this company made a profit of $98 million. This
amount got a very high increase of about 44% in the year 2011 to make the profit reach up to
$142 million, thanks to the seat lottery game(Talwalkar. 2013). The other outcome of this
game is just the fact that many people have been addicted to it with the notion that without
using the $10, they automatically get poor seats. The problem is that the Southwest Airlines
cannot allocate good seats to everybody especially when many people pay this amount. This
situation brought the issue of the company admitting that payment of the $10 does not
necessarily mean that a customer will be guaranteed better seats, but still it remains to be
what is referred to as â??prisoner’s dilemma’ in flight. A person cannot just stop paying for the
seat booking. Even though the fact exists that at times many customers pay in the â??lotteryâ??
and get pissed off after being assigned poor seats, many of them have resolved to pay for it as
their dominant strategy. They already know that even if they do not pay for the early-bird
check-in, many other customers will pay and the company will make their profits as usual.
This means that the company will continue making profits for many other years to come as
many customers will never stop gambling for the best seats.
CHANGE IN SOUTHWEST AIRLINES
4
Customers here prominently experience what is known as prisonerâ??s dilemma. This
exists especially when they have to get involved in a lottery competition for seats against
themselves such that even after realising that nothing can change when all of them play the
game, they find themselves in a situation where they cannot just stop playing it as the
competition tightens and most of the time priority of seat occupation is guaranteed.
The game as it is played has both the negative and positive implications either to the
customers or the Southwest Airline Company. Some of the advantages to the customer
include the fact that they will have their seats reserved especially when the booking is made
around 36 hours before the real flight time. This then increases their confidence in the game
and therefore almost always find themselves involved in it. The check-in has also made it
easy for customers to access their flight pass 24 hours before the departure time. You click in
to check in and then access the pass, so you be able to print it. Due to a large number of
customers paying the $10 in the early bird check in, the good seats are not guaranteed but
still, it has an advantage in the improvement of seat selection, and this increases customers’
comfort while travelling (Thomas. 2018). One great advantage of this game to the company is
that it has boosted the companyâ??s profit generation mechanism that has greatly helped in the
maintenance issues which concerns its services.
All that which have advantages most of the time also have disadvantages. Some of the
disadvantages of this game include the fact that many customers pay for the check-in; thus
the best seats are not guaranteed to all those who pay. This means some people who pay will
still get B and C seats. Another disadvantage to the customer is the fact that no particular
seats are allocated even upon payment, and so a customer has to come and struggle with
others who also paid in the quest for better seats. Family members boarding and sitting next
to each other is almost impossible. This is because of the difficulty in getting many seats at
once, lack of seat allocation and differences in check in times due to competitions.
CHANGE IN SOUTHWEST AIRLINES
This is a perfect way of making profits which other companies should copy and
transform in their ways to help them realise enormous profits. A good way in which a
company, for example, which deals with furniture can realise greater profits is to jointly sell
their goods at a relatively higher price than when they were sold singly; a sofa set, a bed and
a table sold jointly at relatively higher prices than selling them singly. Another way could be
to redesign the company’s workflow strategies for example in replacing human labour with a
computer and then clients are made to pay for the computer services. This means they do not
have to present themselves to the company physically.
5
CHANGE IN SOUTHWEST AIRLINES
6
References
Shefrin, H. (2018). Information Sharing Failures at Southwest Airlines, General Motors, and
the Agencies That Regulate them. Behavioural Risk Management, 319-334.
doi:10.1057/9781137445629_19
Talwalkar, P. (2013). Information Sharing Failures at Southwest Airlines, General Motors,
and the Agencies That Regulate them. Boarding and Game Theory.
doi:10.1057/9781137445629_19
Thomas, M. (2018). Strategic principles at Southwest Airlines. Strategic Direction, 31(8), 1012. doi:10.1108/sd-03-2015-0047

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