Hendricks, K., Piccione, M. and Tan, G.
Equilibria in networks , Southampton, UK University of Southampton
(Discussion Papers in Economics and Econometrics, 9717).
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We study a model in which two carriers choose networks to connect cities and compete for travelling customers. We show that if carriers compete aggressively (e.g., Bertrand-like behavior), one carrier operating a single hub-spoke network is an equilibrium outcome. Competing hub-spoke networks are not an equilibrium outcome, although duopoly equilibria in non-hub networks can exist. If carriers do not compete aggressively, a duopoly equilibrium in hub-spoke networks exists if the number of cities is not small. We provide conditions under which all equilibria consist of hub-spoke networks.
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