Thursday, November 19, 2009
Posted by D. Daniel Sokol
Victor Aguirregabiria (Toronto - Econ) and Chun-Yu Ho (Georgia Tech - Econ) address A Dynamic Game of Airline Network Competition: Hub-and-Spoke Networks and Entry Deterrence.
ABSTRACT: In a hub-and-spoke network, the total profit function of an airline is supermodular with respect to its entry decisions at different city-pairs. This source of complementarity implies that a hub-and-spoke network can be an effective strategy to deter entry of competitors. This paper presents a dynamic game of airlines network competition that incorporates this entry deterrence motive for using hub-and-spoke networks. We summarize the results of the estimation of the model, with particular attention to empirical evidence on the entry deterrence motive.