My dissertation chapters study carriers' pricing and subcontracting strategies in the U.S. airline industry. The first chapter is a joint paper with my advisor Dr. Qihong Liu and committee member Dr. Myongjin Kim. It focuses on the impact of airlines' baggage fee. 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 discuss how the significant price reduction on subcontracting routes may negatively impact regional carriers.

Chapter 2 is a joint paper with my co-advisor Dr. Georgia Kosmopoulou. In this paper, we use Bayesian estimation to study subcontracting network formation and pricing decisions in the US airline industry. We find that, a major carrier is more likely to enter a route in subcontracting services if its rivals have already subcontracted while regional carriers prefer to avoid competition. For existing major carriers per-route, self-service and use of subsidiaries are complementary to subcontracting, while code-sharing is a substitute. Carrier similarity and previously formed networks have significant impacts on new network formations. Taking potential endogeneity issues into account, we find that major carriers’ subcontracting behaviors decrease ticket prices by 3.4%.

The third chapter takes an approach of duopolistic third-degree price discrimination with homogeneous product to understand airlines' carry-on baggage fee decisions, with the assumption of firms competing in price with precommitment of quantities. In the theoretical model, two firms compete in both the high-end market (carry-on passengers) and the low-end market (non-carry-on passengers). A firm may use add-on pricing as a tool to distinguish passengers across markets and charge separate prices. The theoretical results suggest that the adoption of a carry-on baggage fee is caused by the decrease in the willingness to pays or the fraction of non-carry-on passengers, which can be reflected by the decrease in the skewness of airline ticket price distribution. With panel regression and survival analysis, I find a negative relationship between price skewness and the adoption of carry-on baggage fee and provide some evidence supporting the theoretical results. The intuition behind these findings is also provided.