Subcontracting Network Formation Among US Airline Carriers

He, Lei; Kosmopoulou, Georgia

doi:10.2139/ssrn.3308105

Cited by 3 publications

(3 citation statements)

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“…Following the Bayesian estimation method first appearing in Christakis et al. (2010) and further developed by He and Kosmopoulou (2020), we assume that each pair of potential prime contractors and subcontractors meet once to decide whether i forms a link with j for all relevant projects during each period t according to some meeting order ( MO t ), which will be determined endogenously in the Bayesian estimation. Our structure considers decisions made sequentially, as opposed to simultaneously.…”

Section: Model and Estimation Methodsmentioning

confidence: 99%

Subcontracting and the incidence of change orders in procurement contracts

et al. 2021

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In public procurement, most contracts are renegotiated ex post and involve subcontractors. We examine whether there is a causal link between subcontractor use and the incidence of change orders to amend the original scope of a project. Since subcontracting is likely related to unobserved project complexity, we use a novel IV, the predicted level of subcontracting from a method modeled after Christakis et al. ( 2010), to estimate the likelihood of renegotiation. The results establish that subcontractors are associated with an increased likelihood of change orders as well as a higher dollar amount renegotiated.

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Section: Model and Estimation Methodsmentioning

confidence: 99%

Subcontracting and the incidence of change orders in procurement contracts

et al. 2021

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“…Tan (2018) shows that major carriers are more likely to subcontract (and also charge lower ticket prices) on routes with stronger competition. He and Kosmopoulou (2021) examine the impacts of subcontracting on prices in a network framework. In contrast, we explore how subcontracting status affects a carrier's response to price unbundling by its rival.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The exact fee amount depends on whether travelers pay for carry-on baggages in advance and whether they are members of the airline's ultra-low fare club. See "Airline to charge for carry-on bags," CNN, April 6, 2010.3 Exceptions includeShi (2016),Tan (2018), andHe and Kosmopoulou (2021).4 Subcontracting major carriers may also have an incentive to reduce prices further when passengers' itineraries involve connecting flights where parts of the flight itineraries are operated by major carriers and others are operated by regionals. This will not appear in our data though, since we only consider nonstop flights.5 More details can be found in Section 2, Proposition 1.6 Caution is needed when interpreting our results on subcontracting.…”

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Competitive response to unbundled services: An empirical look at Spirit Airlines

Kim

Liu

2021

Economics Manag Strategy

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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 difference-in-difference 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. | INTRODUCTIONPrice unbundling, where charging all-inclusive prices is replaced by a business model of lower basic price plus additional fees for add-ons, has become a strategic tool for firms to boost revenue. For example, hotels are known to collect fees for various services, such as early check-in, Wi-Fi, mini-bar, parking, and gym. Rental car companies often charge for Global Positioning System (GPS) navigation systems, child seats, additional drivers, mileage, early return, drop-off at different locations, and changing rental times or dates. Similarly, the practice of freemium is often observed for digital products, and on app store many apps are available for free with in-app purchase. The US airline industry, which we study in this paper, has experienced a significant increase in price unbundling in recent years as well. Examples include baggage fees, premium seats upgrade, and so forth. Airlines have also found new sources of revenue from services, such as Wi-Fi and Entertainment. Most major airlines started charging for checked bags back in 2008, and in 2017 United and American started selling Basic Economy fares for which travelers need to pay extra to bring a carry-on baggage or pick a seat. 1 Increasing reliance on ancillary revenue by airlines makes it crucial to understand the impacts of airlines' add-on pricing strategies.Carry-on baggage fee is one of the high-priced add-on items. In April 2010, Spirit Airlines (hereafter Spirit) announced that it would charge travelers $20-45 for a carry-on baggage. 2 While multiple carriers had started charging for checked baggages, Spirit was the first carrier to charge for carry-on baggages, and the only one doing so until Frontier and Allegiant followed Spirit's step in 2012 and 2014, respectively. More recently, legacy carriers also started offering basic economy fares, which put restrictions on carry-on baggages among other things.

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