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Carry-on Baggage Fee, Airline Pricing and Subcontracting

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Document pages: 39 pages

Abstract: In 2010, Spirit airlines announced that it would start charging passengers for carry-on baggage. Using a vector of route level characteristics, we construct a matched group consisting of routes which best match those served by Spirit (treated group). We then run a diff-in-diff estimation using the treated and matched group, and examine the impact of Spirit s baggage fee policy on its rivals ticket prices. Our results show that Spirit s rivals reduce their prices by about 5.8 after Spirit charges carry-on baggage fee. Looking into potentially heterogeneous impacts, we find that the policy impact is smaller on low-cost carriers relative to legacy carriers. We also take into account subcontracting status. Relative to non-subcontracting carriers, those which subcontract operations to regional carriers reduce their prices further by more than 10 , including average price (linear or log) and various points on the price distribution. We also develop a stylized theory model to help better understand our empirical findings.

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