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A Dynamic Game of Airline Network Competition: Hub-and-Spoke Networks and Entry Deterrence

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  • Victor Aguirregabiria
  • Chun-Yu Ho

Abstract

In a hub-and-spoke network, the total profit function of an airline is supermodular with respect to its entry decisions at different city-pairs. This source of complementarity implies that a hub-and-spoke network can be an effective strategy to deter entry of competitors. This paper presents a dynamic game of airlines network competition that incorporates this entry deterrence motive for using hub-and-spoke networks. We summarize the results of the estimation of the model, with particular attention to empirical evidence on the entry deterrence motive.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-379.

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Length: 14 pages
Date of creation: 28 Oct 2009
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-379

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Related research

Keywords: Airline networks; Hub-and-spoke; Entry deterrence; Dynamic games; Supermodularity;

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References

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  1. Aguirregabiria, Victor, 2012. "A method for implementing counterfactual experiments in models with multiple equilibria," Economics Letters, Elsevier, Elsevier, vol. 114(2), pages 190-194.
  2. Jan K. Brueckner, 2004. "Network Structure and Airline Scheduling," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 291-312, 06.
  3. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
  4. Ken Hendricks & Michele Piccione & Guofu Tan, 1999. "Equilibria in Networks," Econometrica, Econometric Society, Econometric Society, vol. 67(6), pages 1407-1434, November.
  5. Victor Aguirregabiria & Pedro Mira, 2007. "Sequential Estimation of Dynamic Discrete Games," Econometrica, Econometric Society, Econometric Society, vol. 75(1), pages 1-53, 01.
  6. Ken Hendricks & Michele Piccione & Guofu Tan, 1997. "Entry and Exit in Hub-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 291-303, Summer.
  7. Kim, Sung-Hwan, 2009. "Predatory reputation in US airline markets," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 27(5), pages 592-604, September.
  8. Brueckner, Jan K. & Spiller, Pablo T., 1991. "Competition and mergers in airline networks," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(3), pages 323-342, September.
  9. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 28(4a), pages 836-57, November.
  10. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 394-99, May.
  11. Victor Aguirregabiria & Chun-Yu Ho, 2008. "A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments," Working Papers, University of Toronto, Department of Economics tecipa-337, University of Toronto, Department of Economics.
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Cited by:
  1. Joao Macieira, 2010. "Oblivious Equilibrium in Dynamic Discrete Games," 2010 Meeting Papers, Society for Economic Dynamics 680, Society for Economic Dynamics.
  2. Hüschelrath, Kai & Müller, Kathrin, 2013. "Airline networks, mergers, and consumer welfare," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-028, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Naoaki Minamihashi, 2012. "Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks," Working Papers, Bank of Canada 12-26, Bank of Canada.
  4. Vera Alves & Rosa Forte, 2013. "A Cournot model for analysing the effects of an open skies agreement," CEF.UP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 1311, Universidade do Porto, Faculdade de Economia do Porto.

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