Mutual forbearance,the representativeness heuristic and airline safety

This paper investigates the impact of airline crashes on fares and enplanement over the period 1984–1997. Empirical evidence suggests that none of the large carriers seem to initiate price wars with other large rivals involved in crashes, suggesting mutual forbearance. In contrast, small carriers raise their fares in response to small rivals’ crashes, perhaps commanding higher premiums due to their perceived higher safety level and in anticipation of consumer switching. Further estimation results suggest that only a small fraction of passengers form perceptions about crashes according to the representativeness heuristic. Moreover, large rivals’ crashes are associated with no consumer switching across other large carriers but are associated with enplanement losses for small carriers. The findings suggest that consumer perceptions raise important concerns about the challenges that carriers, especially the smaller ones, may face in depicting their true safety level to consumers whose vision may have been blurred by representativeness bias. Nevertheless, although consumers do not necessarily treat crashes as random events, large carriers may breathe a sigh of relief about the extent of consumer panic and overreaction.