Network Structure and Entry, in the Deregulated Airline Industry

We explore how an incumbent airline firm structures its route network under the threat of entry caused by deregulation. We show that entry induces the incumbent firm to strategically alter its flight operating network from a fully connected network (FC) to a hub-and-spoke network (HS). While most of the literature always assumed that the use of a HS network is primarily for the purpose of cost reduction, we show that hub-and-spoke operation can be used as a strategic device by the incumbent firm when it faces a threat of entry in its operating zone.