Network competition and the difference in operating cost: Model analysis

In this paper, we propose a bi-level air transport market model which can handle the shape of network, airfare and service frequency as airline’s control variables and passenger’s behavior. We apply the model to the simple duopolistic market and observe how airlines change their network shape. We assume two types of airlines, the incumbent and the entrant, having different operating cost and conduct numerical computation. From the results, we discuss the features of network equilibrium considering difference in operating cost and confirm that inviting low cost carriers contributes to improving social welfare.

► We propose a bi-level model which handles the behavior of airlines and passengers. ► We apply the model to the simple duopolistic market. ► Through the computation, equilibrium solutions are obtained. ► We discuss the features of equilibrium considering difference in operating cost. ► The strategy of shaping network changes with the difference in operating cost.