thatairline rmsusedi erentcitiesastheirhub-cityinsteadofsharingthesamehub-city.

Thereisanextensiveempiricalliteratureontheairlineindustrywhichtriestomeasurethee ectofnetworkcharacteristicsandnumberofcompetitorsonprices6However,acloserlookattheindustrysuggeststhatalongwithprices,networkchoicesoughttobeendogenouslydetermined.Inthetheoreticalliteratureonairlinenetworks,somemodelshavebeendeveloped.BruecknerandSpiller(1991,1994)con-sideralinearmodelinwhicheach rmchoosesquantitiesgivenaparticularnetwork.Oum,Zhang,andZhang(1995)examinethee ectsofthestrategicinteractionbe-tweenderegulatedairlinesontheirnetworkchoices.Inparticular,theyaskwhetherswitchingfromalineartoahub-spokenetworkcanbeexplainedby rms’pursuitofstrategicadvantages.Zhang(1996)identi esanegativeexternalityoflocalcompe-titioninairlinehub-spokenetworks.

Inaseriesofarticles,Hendricks,PiccioneandTan(1995,1997,1999)provideageneraltheoreticframeworktoanalyzenetworkchoices.Theyconsideranenviron-mentwheretherearencitiesandindividualsineachcitywhowishtotraveltotheothercities.Thereareseveral rmsintheindustry,eachofwhichhavingtochooseanetworkof ightsandasetofpricesfortravellinginthatnetwork,tomaximizeitspro tsgiventhechoicesoftheother rms.Thus,bothnetworkdesignandpricesareendogenous,andthemarketpricesandnetworksthatresultrepresentanequilibriumoutcome.Theycharacterizethisoutcomeinavarietyofdecisionenvironments.

Hendricks,PiccioneandTan(1995)focusontheoptimalnetworkandpricesforanunregulatedmonopoly rmwhendemandsandcostsaresymmetric.Theirmainresultisthat,ifthereareeconomiesofdensityinthenumberofindividualstravellingbetweentwodirectlyconnectedcities,theoptimalnetworkiseitherahub-spokenetworkorapoint-to-pointnetworkinwhicheverypairofcitiesisconnecteddirectly.Thehub-spokenetworkpossesseshighertra cdensitiesthananyothernetworkswithmoredirectconnections,permitstheuseoflargerplanes,andconsequentlylowersthetotalcostsofsatisfyingagivensetoftraveldemands.Therefore,thecoststructureisonedrivingforcefortheemergenceofhub-spokenetworks.

Hendricks,PiccioneandTan(1997)o eranexplanationastowhymajorhubairportsaredominatedbyafewaircarriersasindicatedbyanumberofempiricalstudies.Inahub-spokenetworkwithncities,connecting ightsarecomplementarygoods,petitionbetweenaregionalandanationalcarrierononeofthese

ExamplesincludeBorenstein(1989),ReissandSpiller(1989),MorrisonandWinston(1990),Brueckner,DyerandSpiller(1992),BruecknerandSpiller(1991,1994),Berry(1992),Kahn(1993)andBambergerandCarlton(1993).6