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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 Group Munich.
    • Handle: RePEc:ces:ceswps:_4397
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp4397.pdf
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    References listed on IDEAS

    as
    1. Kevin M. Murphy & Steven J. Davis, 2000. "A Competitive Perspective on Internet Explorer," American Economic Review, American Economic Association, vol. 90(2), pages 184-187, May.
    2. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
    3. Jan K. Brueckner & Nichola J. Dyer & Pablo T. Spiller, 1992. "Fare Determination in Airline Hub-and-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 309-333, Autumn.
    4. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1611-1633.
    5. Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 67-71, April.
    6. 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.
    7. 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.
    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. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    10. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
    11. Lewbel, Arthur, 1985. "Bundling of substitutes or complements," International Journal of Industrial Organization, Elsevier, vol. 3(1), pages 101-107, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    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. repec:eee:transe:v:104:y:2017:i:c:p:83-96 is not listed on IDEAS
    3. Yongmin Chen & Jianpei Li & Marius Schwartz, 2017. "Competitive Differential Pricing," Working Papers gueconwpa~17-17-10, Georgetown University, Department of Economics.
    4. 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.
    5. repec:rom:mancon:v:11:y:2017:i:1:p:1-8 is not listed on IDEAS
    6. 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.
    7. 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.

    More about this item

    Keywords

    unbundling; airlines; bag fees;

    JEL classification:

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

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