Baggage fees in airlines: Is this a good idea?

Botteon Costa, Raone and Ferman, Bruno and Monte, Daniel (2020): Baggage fees in airlines: Is this a good idea?

Abstract

A recurrent policy question in the airline industry is whether baggage should be priced independently from airline tickets. We show that this policy has ambiguous welfare implications, depending on the cost of carrying luggage and on the market power of the firm. The intuition is simple: there is a trade-off between over-consumption caused by the non-existence of a baggage price against under- consumption caused by firm markups in the case of a separate price for baggages. The commonly used argument that the price of travelling without luggage might drop under a two price-system does not hold in our model.

• Item Type: MPRA Paper
• Language: English
• Keywords: baggage fees, screening, two part tariff, welfare
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising

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