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The Economics of Hubs: The Case of Monopoly

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Author Info
Hendricks, Ken
Piccione, Michele
Tan, Guofu
Abstract

The authors study the optimization problem of an unregulated air carrier that is given the exclusive right to satisfy demand for air travel between any pair of cities. It chooses a network of connections and a set of prices to maximize profits. Thus, both network design and prices are endogenous. The authors characterize the solution to this optimization problem. Their main result is that, if there are economies of density in the number of individuals traveling between two directly connected cities, the optimal network is either a hub of size n - 1 or one in which every pair of cities is connected directly. Copyright 1995 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 62 (1995)
Issue (Month): 1 (January)
Pages: 83-99
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Handle: RePEc:bla:restud:v:62:y:1995:i:1:p:83-99

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  2. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  3. Brueckner, Jan K., 2002. "Network Structure and Airline Scheduling," Working Papers 02-0112, University of Illinois at Urbana-Champaign, College of Business. [Downloadable!]
  4. Rodrigo J. Harrison & Roberto Munoz, 2003. "Stability and Equilibrium Selection in a Link Formation Game," Game Theory and Information 0306004, EconWPA. [Downloadable!]
  5. Marcus Berliant & Hideo Konishi, 2000. "The Endogenous Formation of a City: Population Agglomeration and Marketplaces in a Location-Specific Production Economy," Boston College Working Papers in Economics 451, Boston College Department of Economics. [Downloadable!]
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  6. Felipe Balmaceda, 2004. "Network Formation and Cooperation," Econometric Society 2004 Latin American Meetings 208, Econometric Society. [Downloadable!]
  7. Christopher Mayer & Todd Sinai, 2003. "Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why Not All Delays Are Evil," American Economic Review, American Economic Association, vol. 93(4), pages 1194-1215, September. [Downloadable!]
  8. Haruo Horaguchi, 2008. "Economics of Reciprocal Networks: Collaboration in Knowledge and Emergence of Industrial Clusters," Computational Economics, Springer, vol. 31(4), pages 307-339, May. [Downloadable!] (restricted)
  9. Marco J. van der Leij, 2003. "Competing Transport Networks," Tinbergen Institute Discussion Papers 03-009/1, Tinbergen Institute. [Downloadable!]
  10. Jia Yan & Xiaowen Fu & Tae Oum, 2008. "Exploring Network Effects of Point-to-Point Networks: An Investigation of the Spatial Entry Patterns of Southwest Airlines," Working Papers 2008-21, School of Economic Sciences, Washington State University. [Downloadable!]
  11. Ross M. Starr & Maxwell B. Stinchcombe, 1992. "Efficient Transportation Routing and Natural Monopoly in the Airline Industry: An Economic Analysis of Hub-Spoke and Related Systems," University of California at San Diego, Economics Working Paper Series 92-25, Department of Economics, UC San Diego. [Downloadable!]
  12. Aguirregabiria, Victor & Ho, Chun-Yu, 2009. "A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments," MPRA Paper 16739, University Library of Munich, Germany. [Downloadable!]
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  13. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  14. Harumi Ito & Darin Lee, 2003. "Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and Future," Working Papers 2003-12, Brown University, Department of Economics. [Downloadable!]
  15. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, EconWPA. [Downloadable!]
  16. Hideo Konishi, 1999. "Formation of Hub Cities: Transportation Cost Advantage and Population Agglomeration," Boston College Working Papers in Economics 448, Boston College Department of Economics. [Downloadable!]
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  17. Volodymyr Bilotkach, 2009. "A Framework for Modeling "Real-Life" Airline Networks," Review of Network Economics, Concept Economics, vol. 8(3), pages 255-270, September. [Downloadable!]
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