Optimal fares under uncertainty about airline safety

Abstract

This paper models consumers as expected utility maximizers in order to provide a theoretical assessment of the optimal fares that consumers are willing to pay when faced with uncertainty about airline safety. It is found that under an unsafe state of the world, consumers are willing to pay higher fares and under a safe state of the world, they are willing to pay lower fares. In addition, it is also found that consumers are willing to pay higher fares to maximize the compensation received from airlines in reaction to accidents.

Notes

Large commuter airlines generally had considerably lower accident and fatality rates than small carriers. Larger commuter airlines had 0.67 passenger fatalities per million enplanements comared to 1.27 for all commuter airlines combined.