Welfare Consequences of Upgrades: Evidence from the Airline Industry
(A2025-123962)

AUTHORS

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. With them, regular consumers benefit from discounted access to higher-quality goods, but monopolists adjust price menus to capture surplus. Whether consumer welfare rises or falls when a firm introduces upgrades depends on the relative magnitudes of these two effects. The aim of this research is to disentangle the two effects by analyzing the data of an international airline that offers economy class passengers the option to pay an additional fee to upgrade to business class. I develop and estimate a model of airline pricing to assess the effects of such upgrades via counterfactual simulations. I show that the upgrade option improves the allocation of passengers across cabins, which leads to an increase in consumer and producer welfare of 1.5% and 2%, respectively.