Agenda

Prof. Domenico Fabrizi

Catolica Lisbon

Abstract: 

Using upgrades - fees that customers pay to access a premium quality product after the purchase of a regular one - can significantly affect consumer welfare. On the one hand, regular consumers benefit from potentially accessing the monopolist's higher-quality goods at a discounted price. On the other hand, the monopolist will seek to capture surplus from these gains from trade by offering a different price menu for all goods. Whether consumer welfare will rise or fall when a firm introduces upgrades will depend on the relative magnitudes of these two effects. The aim of this research is to disentangle these two effects in the context of an international airline that gives economy class passengers the option to pay an additional fee to upgrade to business class. I develop and estimate a model of airline pricing in order to assess the effects of upgrades via counterfactual simulations. I show that the upgrade option improves the allocation of passengers among cabins over time and increases consumer and producer welfare by 1.5% and 2% respectively.