Aumann–Shapley pricing for baggage ancillary services

This study explores the application of non-atomic game theory in developing a pricing strategy for airline baggage services within a joint cost setting. We propose a novel approach, based on the Aumann–Shapley pricing method, to determine baggage prices for the airline industry. Our pricing scheme aims to bring transparency and fairness to baggage pricing by considering capacity consumption as a fundamental factor. One of the key features of our approach is its adherence to the existing free baggage limit while offering an axiomatic pricing model. For a joint cost example, we demonstrate that our model preserves the axioms proposed in the pricing approach. Through a simulation study, we observe that the average revenue gain for the proposed pricing mechanism is 7–8%. In the subsequent section, we extend the pricing methodology to accommodate price differentiation for pre-booked and on-site baggage with a weighted value approach. Furthermore, our analysis demonstrates that the weights for the weighted pricing mechanism can be evaluated by a simpler Ramsey–Boiteux rule and weighted proportionality axiom approach. The proposed method can be generalized and applied to other freight pricing scenarios where both volume and weight play significant roles in cost determination.