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A Framework for Modeling Real-Life Airline Networks

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Document pages: 30 pages

Abstract: This paper analyzes conditions for co-existence of hub-and-spoke and point-to-point networks in the airline industry, in which case passengers are segmented between the non-stop and one-stop services. In the baseline model, the monopoly airline s ability to segment the market and effectively set up the mixed network depends on the cost savings due to the through-hub service relative to exogenous quality difference between the one-stop and non-stop flights. Socially inefficient entry with the new non-stop service where an incumbent is operating the hub-and-spoke network is possible. Including frequency choice into the baseline model does not qualitatively affect out main conclusions, while providing for the possibility of market segmentation by the monopolist even where establishing hub-and-spoke network does not produce any cost savings.

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