A numerical investigation of the impact of uncertain demand and varying risk preferences on the pricing and capacity decisions of transportation firms: The case of airlines

In this paper, we attempt to motivate the importance of uncertain demand and varying risk preferences in understanding the behavior of transportation firms. Using specific functional forms, a numerical investigation of this issue is carried out for the case of airlines. The major finding is that changes in risk preferences do not significantly affect the choice of fare but do affect the choice of capacity. This finding is shown to be fairly robust as sensitivity tests are performed for some of the key parameters in the model. Finally, the relevance of the analysis in terms of characterizing the airlines' initial response to deregulation is briefly discussed.