Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees

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 the first 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.