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Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees

Author

Listed:
  • Jan K. Brueckner
  • Darin N. Lee
  • Pierre M. Picard
  • Ethan Singer

Abstract

This paper provides theory and evidence on airline bag fees, offering insights into a real-world case of product unbundling. The theory predicts that an airline’s fares should fall when it introduces a bag fee, but that the full trip price (the bag fee plus the new fare) could either rise or fall. The empirical evidence presented in the paper provides strong confirmation of this prediction. The data also suggest that the average fare falls by less than the bag fee itself, so that the full price of a trip rises for passengers who choose to check bags.

Suggested Citation

  • Jan K. Brueckner & Darin N. Lee & Pierre M. Picard & Ethan Singer, 2013. "Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees," CESifo Working Paper Series 4397, CESifo.
  • Handle: RePEc:ces:ceswps:_4397
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Cheap Airline Tickets Aren’t As Good a Deal As You Think
      by ? in Lifehacker on 2017-02-01 18:00:00
    2. The Pros and Cons of Cheap Air Travel
      by ? in Lifehacker on 2017-04-27 16:00:00
    3. 格安運賃による空の旅、メリットとデメリット
      by ? in ライフハッカー[日本版] on 2017-06-09 08:00:00

    Citations

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    Cited by:

    1. Achim I. Czerny & Zijun Shi & Anming Zhang, 2015. "Can market power be controlled by regulation of core prices alone?: An empirical analysis of airport demand and car rental price," Tinbergen Institute Discussion Papers 15-041/VIII, Tinbergen Institute.
    2. Sebastien Bradley & Naomi E. Feldman, 2020. "Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 58-87, November.
    3. Cho, Woohyun & Dresner, Martin E., 2018. "The impact of a baggage fee waiver on airline choice: Evidence from the Washington-Baltimore region," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 4-17.
    4. Yazdi, Amirhossein A. & Dutta, Pritha & Steven, Adams B., 2017. "Airline baggage fees and flight delays: A floor wax and dessert topping?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 104(C), pages 83-96.
    5. Yongmin Chen & Jianpei Li & Marius Schwartz, 2018. "Competitive Differential Pricing," Working Papers gueconwpa~18-18-10, Georgetown University, Department of Economics, revised 11 May 2019.
    6. Yongmin Chen & Jianpei Li & Marius Schwartz, 2021. "Competitive differential pricing," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 100-124, March.
    7. Adam Bockelie & Peter Belobaba, 2017. "Incorporating ancillary services in airline passenger choice models," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 16(6), pages 553-568, December.
    8. Scotti, Davide & Dresner, Martin & Martini, Gianmaria, 2016. "Baggage fees, operational performance and customer satisfaction in the US air transport industry," Journal of Air Transport Management, Elsevier, vol. 55(C), pages 139-146.
    9. Hanzhao Wang & Xiaocheng Li & Kalyan Talluri, 2022. "Learning to Sell a Focal-ancillary Combination," Papers 2207.11545, arXiv.org.
    10. Veronika NOVOTNA & Stanislav SKAPA, 2017. "A Nonlinear Microeconomic Model Of Goods Production And Sale Using Functional Analysis," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 11(1), pages 1-8, November.
    11. Ødegaard, Fredrik & Wilson, John G., 2016. "Dynamic pricing of primary products and ancillary services," European Journal of Operational Research, Elsevier, vol. 251(2), pages 586-599.
    12. 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.
    13. 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.
    14. 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.
    15. Chiambaretto, Paul, 2021. "Air passengers’ willingness to pay for ancillary services on long-haul flights," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 147(C).
    16. Czerny, Achim I. & Shi, Zijun & Zhang, Anming, 2016. "Can market power be controlled by regulation of core prices alone? An empirical analysis of airport demand and car rental price," Transportation Research Part A: Policy and Practice, Elsevier, vol. 91(C), pages 260-272.
    17. 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.

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    More about this item

    Keywords

    unbundling; airlines; bag fees;
    All these keywords.

    JEL classification:

    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General

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