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

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.