In this article, the author explores how recent high-profile incidents of overbooking cast light on the government regulations that affect pricing in the airline industry. This industry specific example has important lessons for pricers in all industries of how certain government relations and resulting pricing practices can strain relationships with customers. Rafi Mohammed is the founder of Culture of Profit LLC, and author of The 1% Windfall: How Successful Companies Use Profit to Profit and Grow. He can be reached at rafi@cultureofprofit.com. This article originally appeared on the Harvard Business Review (HBR.org).

The Pricing Advisor, June 2017

By now, many of us have viewed the disturbing video of a bloodied man being recently dragged off of United Airlines flight 3411 from Chicago to Louisville. To accommodate four crew members who had to get to Louisville, United claims it offered $1,000 per passenger to relinquish their seats (other reports claim United offered $800). When not enough people volunteered, instead of raising the bounty, United opted to play hardball by involuntarily kicking customers off its plane.

This incident has thrust the common airline practice of overbooking into the spotlight. New Jersey Governor Chris Christie has even called for a government ban on the practice. But a government regulation — an obscure U.S. Department of Transportation (DOT) rule — is already to blame for some of the problems with overbooking.

Overbooking – the practice of selling more tickets on an airplane than there are seats – benefits both airlines and passengers. Airlines benefit from flying full airplanes, which is more profitable than flying with some seats left empty. Since a few passengers often fail to make their flights, overbooking mitigates the risk of empty seats. This helps the airline keep fares lower and provide more flexibility to passengers. Instead of solely selling draconian “take the flight you booked or lose all of your money” trips, airlines provide passengers with an array of options. Passengers who have missed their flights can still get where they’re going, flexible fares allow customers willing to pay a premium to change their plans at will, and even non-refundable tickets can be modified for a fee.

The problem occurs when airlines miscalculate and all of a flight’s passengers show up. Gate agents typically let the market rule by raising the reward until enough flyers decide to change their travel plans. In 2015, 505,000 passengers were voluntarily bumped in this manner and another 46,000 were bumped against their will.

But the DOT has adopted a rule that encourages involuntary bumping — which is undoubtedly less popular with flyers than voluntary bumping. The regulation specifies that if a passenger is involuntarily bumped, airlines have to pay a penalty amounting to 200%–400% (depending on the delay length) of the one-way fare that they paid with a maximum cap of $1,350. This provides an incentive for airlines to bump passengers who paid the least amount for their ticket, often the poorest travelers on the plane. So while United was offering $1,000, the unlucky four who were told to deplane could end up receiving less than half of that amount if they were flying on discounted $200 roundtrip tickets. By setting such a low liability, the DOT is inviting airlines to excessively bump passengers.

Passengers’ rights are limited due to the fine print of airlines’ contracts of carriage, which specifically state that they can be involuntarily bumped. If the DOT is intent on getting involved with involuntary bumping, it should either give passengers more rights — perhaps by banning the practice, though not banning overbooking as Governor Christie has suggested — or take steps to ensure that airlines are fully liable for their actions. This will yield a more market-based result. If involuntary bumping is banned, airlines will have no choice but to offer market-based compensation to voluntarily get people off planes. Similarly, if their liabilities are not capped, airlines will be more generous to avoid the costs of handling a slew of small claims lawsuits.

Airlines set their prices in the free market and the risks that they willingly incur should be solved by the free market. On Sunday, United should have kept raising the amount it would pay until the incentive was strong enough for some passengers to deplane. Instead, it decided to kick people off the plane fully knowing that its payout would be low, courtesy of a government loophole.

Of course, if United really wanted to use common and fiscal sense, it would have hired a car for its crew members to make the five-hour road trip to Louisville.