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Here's what I just wrote at blogsouthwest.com:

To those who believe that Southwest should just raise fares by $5, rather than offering automatic check-in for $10, let's look at this from the standpoint of customer value.

A $5 price increase costs everyone the same amount of money and does not change the perceived value of the product. Sales will decrease a little bit according to the rule of supply and demand.

Some customers find online check-in easy and convenient. Perhaps they work at a computer or have a mobile device, so that they are rarely away from the computer at the 24-hour mark. Some customers don't really care what seat they get, especially for short flights. The $10 optional fee (yes, I'm not afraid to use the F-word here) allows customers in these categories to keep paying the same price, whereas the $5 price increase would cost them $5.

Some customers are picky about the seat they get and competitive about getting a low boarding pass number. These people will be happy to pay the $10 fee, because it delivers more than $10 of value to them.

The customers who value the feature pay for it without burdening the customers who don't. That's efficient pricing, delivering more value per dollar on average to customers with diverse preferences. Southwest began as "one size fits all", but it need not remain that way.

The preceding logic applies somewhat to baggage fees, but the analogy is not precise. Checked baggage is more a necessity than a preference. Everyone I know already prefers to avoid checking bags if at all possible. It takes extra time and effort to check the bag and to retrieve it. Therefore a baggage fee would merely add a financial penalty to the time penalty. No customer value is created by baggage fees.