Analyzing competition for hub location in intercontinental aviation markets

Abstract

This paper develops a game theoretic model that analyzes the competition for hub location when airlines operate in deregulated intercontinental markets. The whole process is viewed as a dynamic game of complete information played in two stages: location and competition. In the location stage, airlines decide the location of the hub after having observed the location of previous entrants. In the competition stage, airlines compete for market share taking into consideration all the possible outcomes in the location stage.Results of the model are applied to intercontinental routes between South-America and Europe in the case of duopoly. Eight different equilibrium outcomes are obtained in terms of the parameters of the model. Some of the solutions obtained highlight the dynamical nature of the location process as well as the relative importance of central location and local traffic at each airport in order to select a hub in this market.