Is the price elasticity of demand asymmetric? Evidence from public transport demand

Demand is frequently found to react differently to price increases than to price decreases. This finding is usually attributed to psychological phenomena such as loss aversion or to the different pace with which price changes become known to potential buyers leading to a kinked demand curve. This kink is often invoked in explaining why prices are sticky, especially in the downward direction. We analyse the presence of and the causes for asymmetric price elasticities of demand for the London Underground. Studying public transport demand offers unique advantages: the service cannot be stored and must be consumed at the point of purchase, and the consumption of public transport cannot be preponed or postponed. During the period that we study some nominal fares on the network have increased while others have decreased, offering a unique opportunity to observe price elasticities for both cases. Comparing changes in price elasticities after a price decrease to changes after a price increase, we find that demand is more sensitive to price increases than to decreases (by 0.5 to 1.0 percentage points). We also find that loss aversion contributes to this asymmetry at least on the intensive margin of transport demand.