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There and Back Again: Airline Routes, Fares and Passenger Flows in Network Equilibria

  • Joseph I. Daniel


    (Department of Economics, University of Delaware)

  • Munish Pahwa

    (MBNA, Newark, DE)

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    We calculate mutual-best-response route networks for profit maximizing airlines serving large US air-traffic-hub cities. A simulated annealing algorithm determines which of over ten thousand potential routes receive direct or hub-and-spoke service. DOT’s Origin and Destination Survey is used to calibrate airline revenue and cost functions. Simulated route structures, airfares, passenger flows, and market concentration levels closely approximate actual US networks comprising over seventy percent of domestic air travel. The results support several controversial positions regarding airline competition. Average airfares by route are consistent with price-taking behavior. Existing industry concentration levels can be justified by cost-reducing economies of scale and scope. Control of multiple airports by individual airlines currently has minimal effects on airfares or passenger flows. Socially optimal route structures would concentrate traffic at fewer and larger airports—but reduce costs only modestly. Airport pricing and capacity can significantly affect network traffic patterns. Investigation of strategic pricing is left for future research.

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    Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 05-07.

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    Length: 71 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:dlw:wpaper:05-07
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    1. Goffe, William L & Ferrier, Gary D & Rogers, John, 1992. "Simulated Annealing: An Initial Application in Econometrics," Computer Science in Economics & Management, Society for Computational Economics, vol. 5(2), pages 133-46, May.
    2. Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages S179-202, October.
    3. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-99, May.
    4. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May.
    5. Van Breedam, Alex, 1995. "Improvement heuristics for the Vehicle Routing Problem based on simulated annealing," European Journal of Operational Research, Elsevier, vol. 86(3), pages 480-490, November.
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