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Airline competition in a hub-dominated environment: An application of noncooperative game theory

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  • Hansen, Mark
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    Abstract

    A model of airline hub competition is developed and applied to the United States air transportation system. Hub competition is portrayed as an n-player, noncooperative game between a set of airlines seeking to maximize profit. Airline competitors are of two types: hub carriers, who can offer connecting service between any two points through their hub as well as direct service to markets local to their hub; and direct carriers, who can offer point-to-point service in any market. The model is operationalized through a set of assumptions that reduce the decision variables of each airline to its set of service frequencies. Models of passenger route choice, average fare, and airline cost are used to develop airline profit functions whose arguments are these frequencies. Numerical methods are used to identify profit-maximizing frequencies for each airline, given the frequencies of the competing airlines. Successive optimizations are used to identify states of quasi-equilibria. The model was applied to the United States using 1985 cost, fare, and demand data. The quasi-equilibrium state was found to resemble the actual system with regard to a number of key system variables, such as the proportion of passengers using connecting service, and with regard to activity levels at most of the largest hubs. On the other hand, there were substantial divergences with respect to some system variables, and with respect to the levels of activity at hubs of two types: those located in multi-airport regions, and those with comparatively weak local markets. Additional research is necessary to explain these differences, as well as to relax some the simplifying assumptions used in the formulation of the hub competition game.

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    Bibliographic Info

    Article provided by Elsevier in its journal Transportation Research Part B: Methodological.

    Volume (Year): 24 (1990)
    Issue (Month): 1 (February)
    Pages: 27-43

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    Handle: RePEc:eee:transb:v:24:y:1990:i:1:p:27-43

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    Cited by:
    1. Adler, Nicole & Pels, Eric & Nash, Chris, 2010. "High-speed rail and air transport competition: Game engineering as tool for cost-benefit analysis," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 44(7), pages 812-833, August.
    2. Eric Pels & Peter Nijkamp & Piet Rietveld, 1998. "Airport Choice in a Multiple Airport Region: An Empirical Analysis for the San Francisco Bay Area," Tinbergen Institute Discussion Papers 98-041/3, Tinbergen Institute.
    3. Mark G. Lijesen & Piet Rietveld & Peter Nijkamp, 2000. "Do European Carriers dominate their Hubs?," Tinbergen Institute Discussion Papers 00-071/3, Tinbergen Institute.
    4. Gupta, Gautam & Goodchild, Anne & Hansen, Mark, 2011. "A competitive, charter air-service planning model for student athlete travel," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 45(1), pages 128-149, January.
    5. Lijesen, Mark G. & Rietveld, Piet & Nijkamp, Peter, 2001. "Hub premiums in European civil aviation," Transport Policy, Elsevier, vol. 8(3), pages 193-199, July.
    6. Alderighi, Marco & Cento, Alessandro & Nijkamp, Peter & Rietveld, Piet, 2005. "Network competition—the coexistence of hub-and-spoke and point-to-point systems," Journal of Air Transport Management, Elsevier, vol. 11(5), pages 328-334.
    7. Marco Alderighi & Alessandro Cento & Peter Nijkamp & Piet Rietveld, 2005. "Network competition - the co-existence of hub-and-spoke and point-to-point," ERSA conference papers ersa05p703, European Regional Science Association.
    8. Nicole Adler & Chris Nash & Eric Pels, 2008. "High-Speed Rail & Air Transport Competition," Tinbergen Institute Discussion Papers 08-103/3, Tinbergen Institute.
    9. Adler, Nicole, 2001. "Competition in a deregulated air transportation market," European Journal of Operational Research, Elsevier, Elsevier, vol. 129(2), pages 337-345, March.
    10. Mark G. Lijesen & Piet Rietveld & Peter Nijkamp, 2000. "Do European Carriers dominate their Hubs?," Tinbergen Institute Discussion Papers 00-071/3, Tinbergen Institute.
    11. Marti­n, Juan Carlos & Román, Concepción, 2003. "Hub location in the South-Atlantic airline market: A spatial competition game," Transportation Research Part A: Policy and Practice, Elsevier, vol. 37(10), pages 865-888, December.
    12. Shiao, Guo-Chou & Hwang, Cherng-Chwan, 2013. "Analyzing competition of international air cargo carriers in the Asian general air cargo markets," Transport Policy, Elsevier, vol. 27(C), pages 164-170.
    13. Nicole Adler & Chris Nash & Eric Pels, 2008. "High-Speed Rail & Air Transport Competition," Tinbergen Institute Discussion Papers 08-103/3, Tinbergen Institute.
    14. Ishii, Masahiro & Lee, Paul Tae-Woo & Tezuka, Koichiro & Chang, Young-Tae, 2013. "A game theoretical analysis of port competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 49(1), pages 92-106.
    15. Nakagawa, Dai & Aoyama, Yoshitaka & Ito, Tadashi & Nishizawa, Hiroyuki, 2005. "Assessment of passenger benefits brought about by international airport projects," Transport Policy, Elsevier, vol. 12(6), pages 512-524, November.
    16. Eric Pels & Peter Nijkamp & Piet Rietveld, 1998. "Equilibrium Airfares, Frequencies and Airport Taxes in a Multiple Airport Region: An Application of the Nested Logit Demand Model," Tinbergen Institute Discussion Papers 98-073/3, Tinbergen Institute.
    17. Wei, Wenbin & Hansen, Mark, 2006. "An aggregate demand model for air passenger traffic in the hub-and-spoke network," Transportation Research Part A: Policy and Practice, Elsevier, vol. 40(10), pages 841-851, December.
    18. Pita, João P. & Adler, Nicole & Antunes, António P., 2014. "Socially-oriented flight scheduling and fleet assignment model with an application to Norway," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 61(C), pages 17-32.
    19. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2000. "Airport and Airline Competition for Passengers Departing from a Large Metropolitan Area," Journal of Urban Economics, Elsevier, vol. 48(1), pages 29-45, July.
    20. Li, Zhi-Chun & Lam, William H.K. & Wong, S.C. & Fu, Xiaowen, 2010. "Optimal route allocation in a liberalizing airline market," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 44(7), pages 886-902, August.
    21. Eric Pels & Peter Nijkamp & Piet Rietveld, 2001. "Airport and Airline Choice in a Multiple Airport Region: An Empirical Analysis for the San Francisco Bay Area," Regional Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(1), pages 1-9.
    22. Chester, Mikhail V. & Ryerson, Megan S., 2014. "Grand challenges for high-speed rail environmental assessment in the United States," Transportation Research Part A: Policy and Practice, Elsevier, vol. 61(C), pages 15-26.

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