Utilizing Risk Allocation for Revenue Management

Companies strive to maximize their profit using different venues e.g. Marketing, Organizational Change, Innovating products, Change of strategy and Revenue management (RM). The use of RM to profit maximization traditionally deals with optimizing pricing and delivery time of products and services. In this work we introduce a mechanism of revenue management based on allocating risk from the consumer to the service provider through a bundled insurance contract, that compensate the consumers in case of service default by the  service provider.

We prove that by adding self-insurance mechanism, we improve profitability. Furthermore, additional profits can be earned by reducing the risk of damages for the consumers and finally we show that optimal service for maximum profitability doesn`t imply risk free service.