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 generalized diff-in-diff estimation, we examine the impact of Spirit’s policy change on its rivals’ prices. Our results show that Spirit’s rivals reduce their prices by about 5% after Spirit’s baggage fee policy. Looking further on the price distribution, we find that the policy impact is larger for prices at the 50-percentile, relative to prices at the 80-percentile and 20percentile. Next, we take into account the outsourcing status of Spirit’s rivals, i.e., whether they operate their own flights or outsource to regional airlines. Our results show that in response to Spirit’s carry-on baggage fee policy, relative to carriers which do not outsource, carriers who outsource reduce their ticket prices significantly more. Due to the common nature of the outsourcing contracts between major and regional carriers, our results suggest that major carriers, facing Spirit’s policy change, shift much of the burden of price reduction to the regional carriers they contract with.