Abstract The article tests for the existence of reference dependence, loss aversion and diminishing sensitivity in airline demand, in the context of price responsiveness amongst low cost, regular and charter airlines. We incorporate the reference-dependent model into a mixed model to control for heterogeneity. The application finds considerable differences between reference and actual prices in decision-making, confirming that reference dependence exists. People react more strongly to price increases than to decreases relative to their reference price supporting the loss aversion phenomenon and that there is diminishing sensitivity for losses only.
Highlights ► The study finds that air travelers use reference prices rather than absolute prices to make their decisions; i.e. they take into account the magnitude of the difference between reference price and actual price. ► Passengers react more strongly to price increases than to price decreases relative to the reference price, suggesting a degree of loss aversion. ► Diminishing sensitivity exists for losses only, showing convexity for these negative values up to a threshold that varies significantly among individuals.
Testing prospect theory in airline demand
Journal of Air Transport Management ; 17 , 4 ; 241-243
2010-01-01
3 pages
Article (Journal)
Electronic Resource
English
Testing prospect theory in airline demand
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