Network Structure and Entry in the Deregulated Airline Industry

In this paper, we explore how an incumbent airline firm structures its route network under the threat of entry caused by deregulation. We show that entry induces the incumbent firm to strategically alter its flight operating network structure from a fully connected network (FC) to a hub-and-spoke network (HS). While the literature always assumed that the use of a HS network is primarily for the purpose of cost reduction, we show that HS can be used as an entry deterrence/accommodation mechanism even in .cases where the HS is more costly to operate. We further analyze the effects of aircraft capacity on the strategic behavior of an airline firm.