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Fare Determination in Airline Hub-and-Spoke Networks

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Author Info
Jan K. Brueckner
Nichola J. Dyer
Pablo T. Spiller

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Abstract

This article provides the first evidence linking airfares to the structure of airline hub-and-spoke networks. The hypothesis tested is that any force that increases traffic volume on the spokes of a network will reduce fares in the markets it serves. This effect arises because of economies of density on the spokes. For example, since a large network (as measured by the number of city pairs that it connects) is expected to have low costs per passenger as a result of high traffic densities, fares in the individual markets served should be low, other things equal. Similarly, holding size fixed, a network that connects large cities should have higher traffic densities on its spokes (and thus lower fares in individual markets) than one serving small cities. Our empirical analysis supports these predictions. We find that network characteristics are important determinants of fares in 4-segment city-pair markets (these are markets requiring a connection at the hub). Furthermore, our empirical model predicts that the TWA-Ozark and Northwest-Republic mergers should have reduced fares in the 4-segment markets served by the hubs at St. Louis and Minneapolis.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 23 (1992)
Issue (Month): 3 (Autumn)
Pages: 309-333
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Handle: RePEc:rje:randje:v:23:y:1992:i:autumn:p:309-333

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  1. Damien J. NEVEN & Lars-Hendrik RÖLLER & Zhentang ZHANG, 1998. "Union Power and Product Market Competition : Evidence from the Airline Industry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9810, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  2. Rafael Moner Colonques & Ricardo Flores Fillol, 2006. "Strategic Effects Of Airline Alliances," Working Papers. Serie AD 2006-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  3. Steven Berry & Michael Carnall & Pablo T. Spiller, 1996. "Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity," NBER Working Papers 5561, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Damien J. Neven & Lars-Hendrik Röller & Zhentang Zhang, 1999. "Union Power and Product Market Competition: Evidence from the Airline Industry," CIG Working Papers FS IV 99-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  5. Joanna Stavins, 1996. "Price discrimination in the airline market: the effect of market concentration," Working Papers 96-7, Federal Reserve Bank of Boston. [Downloadable!]
  6. Kris Gerardi & Adam Hale Shapiro, 2007. "The effects of competition on price dispersion in the airline industry: a panel analysis," Working Papers 07-7, Federal Reserve Bank of Boston. [Downloadable!]
  7. A. Mantovani & O. Tarola, 2006. "Did the entry of low cost companies foster the growth of strategic alliances in the airline industry?," Working Papers 574, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
  8. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004. [Downloadable!]
    Other versions:
  9. Joseph A. Clougherty, 2004. "Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon," Discussion Papers 19, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  10. Oliver Richard, 2000. "An Empirical Analysis of Marketing Alliances Between Major US Airlines," Econometric Society World Congress 2000 Contributed Papers 1770, Econometric Society. [Downloadable!]
  11. Olivier Armantier & Oliver Richard, 2000. "An Empirical Model of Entry Across Airline Routes with Incomplete Information and Demand Synergies," Econometric Society World Congress 2000 Contributed Papers 1771, Econometric Society. [Downloadable!]
  12. Behrens, Kristian & Gaigné, Carl & Ottaviano, Gianmarco I P & Thisse, Jacques-François, 2003. "Inter-regional and International Trade: Seventy Years After Ohlin," CEPR Discussion Papers 4065, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Jan K. Brueckner & Anton Goebel & Esko Niskanen, 1997. "Airline Deregulation: The American Experience and Prospects for Europe," VATT Discussion Papers 149, Government Institute for Economic Research (VATT). [Downloadable!]
  14. Damien J. Neven & Lars-Hendrik Röller & Zhentang Zhang, 2002. "Endogenous Costs and Price-Cost Margins," Discussion Papers of DIW Berlin 294, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  15. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  16. Philip G. Gayle, 2004. "Does Price Matter? Price and Non-price Competition in the Airline Industry," Econometric Society 2004 North American Summer Meetings 163, Econometric Society. [Downloadable!]
  17. Claudio Agostini, 2005. "El Mercado de Transporte Aéreo: Lecciones para Chile de una Revisión de la Literatura," ILADES-Georgetown University Working Papers inv163, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  18. Austan Goolsbee & David B. Gross, 1997. "Estimating Adjustment Costs with Data on Heterogeneous Capital Goods," NBER Working Papers 6342, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. 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!] (restricted)
  20. Damien J. Neven & Lars-Hendrik Röller & Zhentang Zhang, 1997. "Union Power and Product Market Competition: Evidence from the Airline Industry," CIG Working Papers FS IV 97-38, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
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