Question

Airlines routinely sell more tickets for flights than the number of seats on the plane. “Overbooking” seldom causes problems because a statistically predictable number of ticketholders fail to show up for flights. In contrast, each retailer of hearing aids typically has the capacity to sell many more hearing aids per week than it actually sells. “Excess capacity” is routine for retailers of hearing aids. Contrast the effects of overbooking and excess capacity on profits lost by the seller when the buyer breaches a contract to buy.

Answer 1

Airlines are still able to save themselves from losses by overbooking. Airlines realize that there are many last minute cancellations so that if they do not overbook, they will running at a loss. So when they overbook and there are last minute cancellations, they are still able to run a flight with all seats occupied. Hence when ticket holders breach their contracts, airliners are not able bear any losses due to overbooking

In contrast, excess capacity is the potential to produce more. A store that has more number of hearing aids than what it is able to sell. In that case, when a buyer breaches the contract the seller faces losses because of unsold items but the same are not considered losses because a sale is simply not made.