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The competitive effects of product unbundling: Evidence from U.S. airlines

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  • Fiore, Alexander
  • Zanzalari, Danielle

Abstract

This paper examines how one firm’s decision to unbundle its product affects its competitors’ pricing strategies. Existing literature discusses the effect on prices of the unbundling firm, but previous work often ignores the asymmetric scenario where one firm unbundles while the competing firm does not. We contribute to the literature by modeling and empirically testing the asymmetric case of product unbundling on competitors’ prices using a large dataset of U.S. domestic airfares. The variation in timing and implementation of bag fees among airlines during 2007-2009 provides a unique opportunity to identify the effects of product unbundling. We find competitor bag fees lead to lower ticket prices for a majority of airlines and routes. While the average effect is a 2% drop in ticket price, additional evidence indicates the reduction in ticket price is larger on longer routes and routes characterized as having a greater proportion of business travelers.

Suggested Citation

  • Fiore, Alexander & Zanzalari, Danielle, 2023. "The competitive effects of product unbundling: Evidence from U.S. airlines," Journal of Air Transport Management, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:jaitra:v:112:y:2023:i:c:s0969699723000972
    DOI: 10.1016/j.jairtraman.2023.102454
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    References listed on IDEAS

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    More about this item

    Keywords

    Airlines; Unbundling; Add-on pricing; Competitive effect; Bag fees;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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