| Article ID: | iaor200949081 |
| Country: | United Kingdom |
| Volume: | 3 |
| Issue: | 3 |
| Start Page Number: | 277 |
| End Page Number: | 284 |
| Publication Date: | Oct 2004 |
| Journal: | Journal of Revenue and Pricing Management |
| Authors: | Weatherford Larry R |
| Keywords: | risk |
An assumption of risk–neutrality lies at the heart of the standard algorithm for leg inventory optimisation (EMSR). This paper examines how to modify EMSR scientifically to account for different risk preferences (eg risk aversion). This new approach is called expected marginal seat utility (EMSU). A comparison is made between the differences in booking limits that are generated by the different risk preferences. Simulation analysis is used to show what the differences in expected revenues and expected utilities are between the two methods. The results show that switching to EMSU in cases of risk aversion can increase expected utility by 1.6–4 per cent.