Network competition—the coexistence of hub-and-spoke and point-to-point systems

Abstract

The paper identifies conditions under which asymmetric equilibria may exist when carriers compete in designing their network configurations in a game-theoretical framework. Two carriers are assumed here, which are allowed to play three different strategies: point-to-point (PP), hub-and-spoke (HS) or multi-hub. We find two main stable outcomes, which depend on the size of the internal market. First, when the internal markets are small, PP network strategies are played by both carriers, while for a specific subset of parameters a collusive equilibrium in a HS configuration can be derived. Second, when the size of the internal markets is large, asymmetric configurations, where one carrier chooses a HS strategy and the other chooses a PP strategy, are the only stable equilibria. The result can be used to describe the coexistence of alternative business models that have recently emerged in the aviation industry: the established full-service model based on the HS system and the recent low-cost model based on the PP system.