On the Regulation of Checked Baggage in the Airline Industry

Abstract

ABSTRACT In 2017, the Brazilian civil aviation agency changed the checkedbaggage policy, and airline companies would no longer be required to offer free baggage for its passengers. This paper builds a model to study the effects on the market equilibrium of this change in regulation. We suppose that firms operate in an oligopoly market and compete by choosing tickets and baggage quantity as in a Cournot model. Firms had to offer a free quota of baggage, which was set to zero with the deregulation. Both products enter in the firm's cost function. First, we show that the firm's profits do not change with the liberalization policy. Then, we calibrate the model's parameters using Brazilian data. Backed up by numerical simulations, we show that allowing firms to charge baggage separately from tickets results in a decrease in ticket prices (but an increase in total prices) and an increase in the amount of tickets sold in the market. Consumers are expected to have a larger surplus, hence increasing the market welfare. Our results are robust to variations in the parameters of the model. Highlights The Brazilian civil aviation agency changed the checked baggage policy; Companies are no longer be required to offer free baggage for its passengers; We set a model where firms operate in an oligopoly and study airline industry deregulation; Firm's profits do not change with the liberalization policy; There is a decrease in ticket prices (but an increase in total prices) and an increase in amount of tickets sold in the market.