A dynamic oligopoly game of the U.S. airline industry: Estimation and policy experiments. Working paper

This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors which may explain the adoption of hub-and-spoke networks: (1) travelers value the services associated with the scale of operation of an airline in the hub airport (e.g., more convenient check-in and landing facilities, more flexible schedules); (2) operating costs and entry costs in a route may decline with an airline’s scale operation in origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As a methodological contribution, we propose and apply a simple method to deal with the problem of multiple equilibria when using a estimated model to predict the effects of changes i