Hub-and-spoke network alliances and mergers: Price-location competition in the airline industry

Abstract

This paper presents a framework to analyze global alliances and mergers in the airline industry under competition. The framework can help airlines identify partners and network structures, and help governments predict changes in social welfare before accepting or rejecting proposed mergers or alliances. The research combines profit-maximizing objectives to cost-based network design formulations within a game theoretic framework. The resulting analysis enables merging airlines to choose appropriate international hubs for their integrated network based on their own and their competitors’ costs and revenues in the form of best response functions. The results of an illustrative example suggest that some mergers may be more successful than others and optimal international gateway choices change according to the number of competitors remaining in the market. Furthermore, although the pressure on airlines would suggest a strong preference for mergers or alliances, perhaps surprisingly, the solution outcomes whereby all airlines merge or ally are not equilibria in the overall game.