AN EMPIRICAL ANALYSIS OF THE EFFECTS OF AIRLINE BAGGAGE FEES ON CONSUMER UTILITY

Open Access
Author:
Trachman, Nicole Marie
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Paul L E Grieco, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • Airlines
  • Baggage Fees
  • Discrete Choice
  • Economics
  • Industrial Organization
  • Domestic Flights
  • Utility
  • Legacy Carriers
  • LCC
  • Microeconomics
Abstract:
This paper aims to provide insight into how consumers react to the increasing price that airlines charge for a bag. From 2007 to 2017, the airline industry saw an increase of 411% in the amount of revenue brought in just from baggage fees. This increase comes with a large change in the way bag fees are instituted, spanning from a time where bag fees were rarely charged to a time where they exist on almost all airlines. Using data from the Department of Transportation, a unique dataset is created entailing the average fairs, market shares, baggage fees, and other relevant information for 10 chosen airlines, on the Top 100 routes, over an 11-year period. This data is then used to test for differences in utility that carry on and first bag fees create, compared to the utility change generated from simply paying for the airline ticket. I find that in all tested cases, the loss of utility for the consumer is larger when bag fees increase than when the ticket price increases. The significance of this difference varies by way of testing, leading to a conclusion that consumers react equally, or slightly more negatively, to bag fee increases than they do to ticket price increases. The findings of this paper are important to consumers and airlines alike. In order for airlines to maximize their profits, it is crucial that they understand how consumers react to price changes. To provide further understanding of the consumer’s choices, I include a model extension, which separates different carrier types and provides more significant evidence that bag fees generate larger utility losses than the losses incurred from paying for the ticket initially.