Hub-Spoke Network Choice Under Competition with an Application to Western Europe

T aim of this paper is to present a model structure that analyzes the hub-spoke network design issue within a competitive framework. Under deregulation, airlines have developed hub-and-spoke networks, enabling them to increase frequency by aggregating demand and to prevent entry into the marketplace by reducing airfares. While liberalization in the United States and Europe was undertaken to increase competition, the results in this direction are unclear. This research evaluates airline profits based on a microeconomic theory of airline behavior under deregulation and the effect on hub-and-spoke networks. Through a two-stage, Nash best-response game, we search for equilibria in the air transportation industry. The game is applied to Western Europe, where profitable hubs and monopolistic equilibria are clearly identifiable, and duopolistic equilibria are potentially viable, given sufficient demand.