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The Role of Demand Uncertainty in Airline Network Structure

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  • Barla, Philippe
  • Constantatos, Christos

Abstract

In this paper, we provide another reason that may explain the adoption of the hub-and-spoke network structure in the airline industry. We show that when an airline has to decide on its capacity before the demand conditions are perfectly known, a hub-and-spoke network structure by pooling passengers from several markets into the same plane helps the firm to lower its cost of excess capacities in the case of low demand and to reduce its opportunity cost of rationing in the case of high demand.

Suggested Citation

  • Barla, Philippe & Constantatos, Christos, 1999. "The Role of Demand Uncertainty in Airline Network Structure," Cahiers de recherche 9903, Université Laval - Département d'économique.
    • Handle: RePEc:lvl:laeccr:9903
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    File URL: http://www.ecn.ulaval.ca/w3/recherche/cahiers/1999/9903.pdf
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    References listed on IDEAS

    as
    1. Ken Hendricks & Michele Piccione & Guofu Tan, 1995. "The Economics of Hubs: The Case of Monopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 83-99.
    2. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 836-857, November.
    3. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
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    Cited by:

    1. Barla, Philippe, 1999. "Demand Uncertainty and Airline Network Morphology with Strategic Interactions," Cahiers de recherche 9907, Université Laval - Département d'économique.

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    More about this item

    Keywords

    Airlines; Network; Demand uncertainty; Hub;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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