Competitive Response to Unbundled Services: An Empirical Look at Spirit Airlines

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 (the 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. We also look into potentially heterogeneous responses across different types of rivals. There is no significant difference in how low-cost carriers and legacy carriers respond to Spirit's policy change. However, relative to non-subcontracting carriers, those which subcontract operations to regional carriers reduce their prices further by more than 10%, including average prices (linear or log) and various other points on the price distribution. We also develop a stylized theory model to help better understand our empirical findings.

Keywords: Carry-on baggage fee; Unbundling; Add-on pricing; Subcontracting; Low-cost carriers

JEL Classification: D43, L13, L24, L93