Abstract
Psychologists have long since recognized that consumers have limited cognitive ability, and that this prevents them from weighing up all product attributes when making a choice. More recently, a new framework for consumer choice has been developed which takes account of this, by assuming that consumers are drawn to salient features of a product. We apply the framework of salient thinking to a simple transport market in which passengers may attach different weights to the utility of the trip (its comfort and/or duration) and the fare. We find the optimal fare structure in this market, and investigate under which conditions operators use their pricing schedule to focus passengers’ attention on fare, and when they direct attention towards trip duration or comfort. Furthermore, we address the quality investments made by operators compared to a rational benchmark. Quality enhancement in this model is increasing in the unit cost of providing the service. We finally discuss the implications of the theory of consumer choice, and the competitive model for transport markets compared to the predictions of a rational model. This leads to several testable situations which could give implications for policy makers and transport firms.
Highlights
The liberalisation of transport markets in many industrialised countries has led to an increasing interest in the strategic interactions of transport operators
Tversky and Kah neman (1981) find that the rates at which consumers trade off time and money is context-dependent, violating the assumption common for the analysis of transport markets. Since both time and money are important for passengers, this paper looks at how transport operators set their fares and quality level given that passengers allow relative comparisons to influence their decisions
The introduction of a seat surcharge on airlines will be expected to increase demand of higher quality services relative to low, according to the theory.21. This demand shift phenom enon is interesting from a policy point of view, since one may consider that a common surcharge imposed on transport operators will not change the nature of competition between them since passengers rationally calculate that the fare differential is unchanged
Summary
The liberalisation of transport markets in many industrialised countries has led to an increasing interest in the strategic interactions of transport operators. Tversky and Kah neman (1981) find that the rates at which consumers trade off time and money is context-dependent, violating the assumption common for the analysis of transport markets Since both time (journey length) and money (fare) are important for passengers, this paper looks at how transport operators set their fares and quality level given that passengers allow relative comparisons to influence their decisions.. Bordalo, Gennaioli, and Shleifer (2013) have developed a formal model of how consumers make choices when an attribute is salient to the decision, and Bordalo, Gennaioli, and Shleifer (2016) extend this to a competitive setting in which duopolists make decisions about price and product quality It is this latter model that we utilize here to analyse competition between transport operators who attempt to draw passen gers’ attention to the attribute in which they have an advantage.
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