Network Competition: the Coexistence of Hub-And-Spoke and Point-To-Point Systems

Part of the Contributions to Economics book series (CE)

The deregulation of the aviation market in the United States in 1978 has intensely affected the airlines' network configuration. As described in Chap. 2, a number of ‘trunkline’ carriers have rapidly reorganized their network structures from point-to-point (PP) systems into hub-and-spoke (HS) systems. In the EU the deregulation process produced similar results, although its effect on the market was not so radical. European carriers had already concentrated intercontinental flights into an HS structure, while they developed a mixed HS and PP network for shorter distances (national and international flights). The low-cost carriers (LCCs) model boomed in both the US and the EU thanks also to lower operational costs and a simplified business model. In Chap. 2 we showed that the LCCs' cost advantage is the outcome of a streamlined production process in contrast to the complexity of the hub-and-spoke system of the FSC. Thus, in this chapter we compare the FSC business model and the new LCC business model in terms of their network configuration. Here the analysis is performed from a theoretical point of view, while the empirical application will be carried out in Chap. 7. We examine a game-theoretical context where carriers are allowed to play three different strategies: point-to-point (PP), hub-and-spoke (HS), or multi-hub (MH), and we identify the conditions under which asymmetric equilibriums may exist. We further discuss how the outcomes of the model can be used to describe the observed coexistence of different business models.


Consumer Surplus Price Discrimination Monopoly Power Price Rule Asymmetric Equilibrium 
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© Physica-Verlag Heidelberg 2009

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