Abstract
In this paper a model of oligopolistic competition on airline networks is presented,
where each carrier competes with the others by choosing structure of its network, price of
routes, frequency of flights and size of planes. Airline competition is modeled as a
two-stage game. In the first-stage carriers play a simultaneous static game deciding which
market to serve. As a result a network structure is defined. Markets are connected by
paths referred to as routes. In the second-stage each airline maximizes its profit while
considering consumers choices and airplanes capacity constraints. To find the demand for a
route a nested logit function of individual choices is used, total demand is then obtained
by aggregating preferences of all the consumers. The problem of finding Nash equilibrium
solutions for the second-stage game is formulated as a variational inequality problem and
solved by a standard decomposition algorithm.
The model is implemented by simulating competition on sample networks. As a result, a
contribution to the study of network rivalry is given with the following three aims. To
study how variations of demand affects network structures. To analyse the effects of entry
of competitor on markets served by an monopolistic incumbent. To detect entry barriers
deriving by the extension of the network of an incumbent.
Working Paper 20-96, DIS, June 1996
Dipartimento di Informatica e Sistemistica, via Buonarroti 12, 00185 Roma, Italy