Consumer Expectations of Capacity Constrains and Their Effect on the Demand for Multi-Class Air Travel

This paper argues that a consumer's decision on ticket class takes into account the expected likelihood of obtaining a seat in a particular class which, in turn, partially depends on an optimum "transaction cost". Taking into account the preferences of the consumer and the information that the consumer is endowed with, the consumer will select a ticket that includes its own optimal transaction cost. This motivates the inclusion of the capacity constraint as a proxy independent variable for these consumer expectations This then forms the basis of a model of air-travel demand with specific reference to Australia. A censored likelihood function allowing for correlation in the disturbance term across k classes is introduced. The correlation in the disturbances arises as a result of the interdependence of the capacity constraints in k different ticket classes on each flight.