A Simple Network Model of Airline Route CompetitionTony Dziepak
Here is a simplified model that demonstrates the effects of competition between hub- and non-hub airlines.
In this simple model, we assume 4 airports, A,B,C, and D; and two airlines: a large hubbing airline, and a discount airline.
The hubbing airline uses city B as its hub, and has flights from B to each of the other cities A,C, and D.
The discount airline only flies between city pair AC, which is the most popular nonhub city pair.
In this model, City pairs AB, BC, and BD are direct flights operated only by the hubbing airline, and fares are expected to be high.
City pairs AD and CD are only available through a 1-stop flight through the hub B. These flights are also expensive--more expensive than the nonstop hub flights, but cheaper than the sum of the fare for the two individual segments individually.
The only competitive city pair is AC. Here the hub airline is forced to reduce its fare for a 1-stop between A and C with a stopover at B. The price of this 1-stop is actually cheaper than at least one of the two individual segments. The hub airline can prevent arbitrage by the threat of cancelling return flights if passengers try to buy a round trip and use only the first leg of their total flight. Currently, the FTC does not consider this an anticompetitive behavior, but this may change.