IDEAS home Printed from https://ideas.repec.org/a/eee/jaitra/v112y2023ics0969699723000972.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0969699723000972
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jairtraman.2023.102454?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    2. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    3. Gayle, Philip G. & Wu, Chi-Yin, 2013. "A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry," Economics of Transportation, Elsevier, vol. 2(4), pages 119-130.
    4. Brueckner, Jan K. & Lee, Darin & Singer, Ethan S., 2013. "Airline competition and domestic US airfares: A comprehensivereappraisal," Economics of Transportation, Elsevier, vol. 2(1), pages 1-17.
    5. Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn.
    6. Frank Verboven, 1999. "Product Line Rivalry and Market Segmentation—with an Application to Automobile Optional Engine Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 399-425, December.
    7. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    8. Gila Fruchter & Eitan Gerstner & Paul Dobson, 2011. "Fee or free? How much to add on for an add-on," Marketing Letters, Springer, vol. 22(1), pages 65-78, March.
    9. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    10. Jan K. Brueckner & Darin N. Lee & Pierre M. Picard & Ethan Singer, 2015. "Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 457-484, September.
    11. Jeffrey D. Shulman & Xianjun Geng, 2013. "Add-on Pricing by Asymmetric Firms," Management Science, INFORMS, vol. 59(4), pages 899-917, April.
    12. R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, vol. 76(2), pages 211-232, April.
    13. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    14. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, February.
    15. Steven A. Morrison, 2001. "Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines," Journal of Transport Economics and Policy, University of Bath, vol. 35(2), pages 239-256, May.
    16. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    17. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    18. Lei He & Myongjin Kim & Qihong Liu, 2022. "Competitive response to unbundled services: An empirical look at Spirit Airlines," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 115-145, February.
    19. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1611-1633.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wu, Jiaxuan & Sun, Xiaoqian & Xu, Yifan & Jiang, Changmin & Wandelt, Sebastian, 2025. "Hydrogen airport location selection and fleet assignment under policy considerations," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 197(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luttmann, Alexander & Ladd, Daniel, 2023. "Loyalty rewards and redemption behavior: Stylized facts for the U.S. airline industry," MPRA Paper 119214, University Library of Munich, Germany.
    2. Yao Cui & Izak Duenyas & Ozge Sahin, 2018. "Unbundling of Ancillary Service: How Does Price Discrimination of Main Service Matter?," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 455-466, July.
    3. Brad Shrago, 2024. "The Spirit Effect: Ultra-Low Cost Carriers and Fare Dispersion in the U.S. Airline Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(4), pages 549-579, June.
    4. Jan K. Brueckner & Darin N. Lee & Pierre M. Picard & Ethan Singer, 2015. "Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 457-484, September.
    5. Myongjin Kim & Qihong Liu & Nicholas G. Rupp, 2023. "When Do Firms Offer Higher Product Quality? Evidence from the Allocation of Inflight Amenities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(2), pages 149-177, March.
    6. Jeffrey D. Shulman & Xianjun Geng, 2013. "Add-on Pricing by Asymmetric Firms," Management Science, INFORMS, vol. 59(4), pages 899-917, April.
    7. Ma, Wenliang & Wang, Qiang & Yang, Hangjun & Zhang, Guoquan & Zhang, Yahua, 2020. "Understanding airline price dispersion in the presence of high-speed rail," Transport Policy, Elsevier, vol. 95(C), pages 93-102.
    8. Lei He & Myongjin Kim & Qihong Liu, 2022. "Competitive response to unbundled services: An empirical look at Spirit Airlines," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 115-145, February.
    9. Qianbo Yin & Kwei‐Long Huang & Chia‐Wei Kuo & Sean X. Zhou, 2021. "Add‐On Pricing in a Distribution Channel," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4069-4088, November.
    10. Luttmann, Alexander & Gaggero, Alberto A, 2020. "Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry," MPRA Paper 104863, University Library of Munich, Germany.
    11. Fukui, Hideki, 2019. "How do slot restrictions affect airfares? New evidence from the US airline industry," Economics of Transportation, Elsevier, vol. 17(C), pages 51-71.
    12. Nevin Mutlu & Hadi El-Amine & Ozge Sahin, 2023. "Offering Memories to Sell Goods? Pricing and Welfare Implications of Experiential Retail," Manufacturing & Service Operations Management, INFORMS, vol. 25(5), pages 1765-1778, September.
    13. Borsati, Mattia & Fageda, Xavier, 2024. "Airline price responses in the face of demand shocks: European lessons from the COVID-19 pandemic," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 186(C).
    14. Peiwen Yu & Haiyang He & Lei Lei, 2025. "Pricing Durable Add-Ons: Selling vs. Leasing," Management Science, INFORMS, vol. 71(10), pages 8336-8346, October.
    15. Alexei Alexandrov & Özlem Bedre-Defolie, 2014. "The Equivalence of Bundling and Advance Sales," Marketing Science, INFORMS, vol. 33(2), pages 259-272, March.
    16. Manuel A. Hernandez & Steven N. Wiggins, 2014. "Nonlinear Pricing Strategies And Competitive Conditions In The Airline Industry," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 539-561, April.
    17. Lewis, Matthew S., 2021. "Identifying airline price discrimination and the effect of competition," International Journal of Industrial Organization, Elsevier, vol. 78(C).
    18. Luttmann, Alexander, 2019. "Evidence of directional price discrimination in the U.S. airline industry," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 291-329.
    19. Marco Savioli & Lorenzo Zirulia, 2020. "Does add-on presence always lead to lower baseline prices? Theory and evidence," Journal of Economics, Springer, vol. 129(2), pages 143-172, March.
    20. Kopczewski, Tomasz & Sobolewski, Maciej & Miernik, Ireneusz, 2018. "Bundling or unbundling? Integrated simulation model of optimal pricing strategies," International Journal of Production Economics, Elsevier, vol. 204(C), pages 328-345.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaitra:v:112:y:2023:i:c:s0969699723000972. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/journal-of-air-transport-management/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.