Airline market share and customer service quality: A reference dependent model

Traditional models that explain the nature of the relationship between customer service quality and airline demand assume that the relationship can be approximated by using smooth or differentiable curves. Suzuki and Tyworth, however, recently argued that this assumption may not be valid, and that, if it is invalid, the model performance can be improved by using non-smooth functions to represent the relationship (Suzuki, Y., Tyworth, J.E., 1998. A theoretical framework for modeling sales-service relationships in the transportation industry. Transportation Research E 34 (2), 87-100). We use their framework to develop a model that represents the relationship between service quality and market share in the airline industry and then empirically compare its performance with conventional airline demand models. The results indicate that the relationship is characterized by a non-smooth curve and that our model provides a significantly better goodness of fit than other conventional demand models.