Pricing and the consumer

This paper presents a different way for airlines to think about pricing. Specifically, this paper shows how airlines can make more money if they consider consumer psychology in their pricing decisions. British Airways is used as an applied example, while the theoretical framework used to examine consumer psychology is Prospect Theory. This theory was developed by Kahneman and Tversky, who spent their careers studying consumer decision–making. In their research they showed that consumers are not rational as believed by economists, but are irrational; often this irrationality follows a pattern. The explanation of the pattern is the foundation of Prospect Theory, which is discussed in this paper. They were not economists, but psychologists. Dr Kahneman was awarded the Nobel Prize in Economics for his ground–breaking work. Because the Nobel Prize is not awarded posthumously, Dr Tversky did not receive the award; however, he did receive a mention which is very rare. This paper is adapted from comments at the IATA Revenue Management Conference held in Budapest in 2005.