Testing prospect theory in airline demand

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. (C) 2010 Elsevier Ltd. All rights reserved.