A few years ago when this compensatory regime first came into effect, there was a hope that the cowboy element would diminish. In particular, the possibility of waiting for a flight home and being told that because the plane had gone tech, pax would sometimes instead have to wait until there was space on future flights. On a twice weekly route in high season, this was sometimes 10 days away. If the original airline won't pay for a transfer to another carrier and you need to get home today - can you always afford to pay the full Y-class fare ?
When horror stories like this get into the press, the public become much more wary about booking. The compensatory regime achieves 2 things:
1) The cowboy element is tamed
2) Pax have the confidence to book a flight, knowing that the cost of compensation makes an airline act less like a cowboy. This should also increase ticket sales.
Want to fly off for the weekend, but need to be back home on Sunday evening for work on Monday ? Do you risk catching that flight on Sunday afternoon knowing the airline won't give a s**t if you're left stranded for a week ?
Now suppose we know the airline will get penalised for doing this - it's now much more likely the airline will make best efforts not to leave you stranded.
The compensatory regime has been essentially toothless. Airlines could get away with anything. John Smith doesn't have the technical knowledge to verify anything an airline may claim. By setting up a credible threat, pax have increased confidence to make a booking.
Compensation should occur very rarely - it's only there to ensure *all* airlines make best efforts when things go wrong - not to encourage the litigious and penalise unneccesarily.