Equilibria in Networks

Ken Hendricks, Michele Piccione and Guofu Tan

Econometrica, 1999, vol. 67, issue 6, 1407-1434

Abstract: We study a model in which two carriers choose networks to connect cities and compete for 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 hubs always exists if the number of cities is not small. We provide conditions under which all equilibria consist of hub-spoke networks.

Date: 1999
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