Equilibria in Networks
Ken Hendricks, Michele Piccione, Guofu Tan
Econometrica · 1999 · Volume 67 · Issue 6
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 nonhub networks can exist. If carriers do not compete aggressively, an equilibrium with competing hub-spoke networks exists as long as the number of cities is not too small. We provide conditions under which all equilibria consist of hub-spoke networks.
Keywords
Economies of density, hub-spoke networks, competition.
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