Multi-Class Demand with Capacity Constraints: Theory and Estimation

This paper develops a theory of consumer discrete choice and an empirical model for multi-class demand in the presence of capacity constraints. A key aspect of the proposed theory is that the probability of the availability of a discrete alternative may be manipulated by expending resources. Optimal choice behaviour is described by the interaction between the expenditure of resources on manipulability and the relative utility benefits gained from each of the alternatives. In this context, the theory proposes that the expected available capacity for an alternative has an explicit impact on consumer choice and should be used in demand estimation. Empirically, a two-limit seven (class) equation multivariate Tobit model of regional airline travel in Australia is estimated and confirms the importance of expected capacity constraints in explaining the demand for the different classes of air travel. The implications for airline class settings strategies are also discussed.