Competition in a deregulated air transportation market

Abstract Under deregulation, airlines developed hub-and-spoke (HS) networks enabling them to aggregate demand, increase frequency, reduce airfares and prevent entry into the marketplace. This research evaluates airline profit based on micro-economic theory of behaviour under deregulation. Through a two-stage Nash best-response game, equilibria in the air transportation industry is sought to evaluate the most profitable HS network for an airline to survive in a deregulated environment. In the first stage of the game, an integer linear program aids in generating potential networks. In the second stage, a nonlinear mathematical program maximizes profits for each airline, based on the networks chosen by all participants. The variables of the mathematical program include frequency, plane size and airfares. In an illustrative example, both monopoly and duopoly solutions are attainable as a function of demand.