Have any one of you encountered these situations:
The restaurant say: Sorry we oversold your table and do you mind coming back tomorrow for your anniversary dinner?
The theater says: Sorry we oversold your seat and do you mind coming back one year later when the orchestra returns?
The stadium says: Sorry we oversold your seat and do you mind watching Broncos vs. Bulldogs next week instead of Broncos vs. Cowboys Derby?
The seller says: Sorry I oversold my house despite you already paid me in full. Do you mind waiting till I am selling again and I will give you a discount?
But why is airlines industry so special that can make overselling as their standard procedure? Of course cancellation and alteration happens all the time. But no other industries are inconveniencing customers in order to reduce the cost.
What do you mean by "allowed"?
Aviation authorities can only dictate what airlines do in domains that influence safety. Authorities cannot interfere in the business practices of an airline.
The general public and patrons of airlines are typically unaware that overbooking occurs until it directly impacts them or the media picks up a story like the recent United Airlines fiasco.
It's far more profitable for airlines to over-sell seats on every flight they make and then give a token gesture of "compensation" to those they kick off flights, the fact they inconvenience their passengers doesn't bother them in the slightest because they're making money from this practice. Unless people vote with their wallets and stop flying with an airline they will continue to do it.