The Economics of Hubs: The Case of Monopoly.

The authors study the optimization problem of an unregulated air carrier that is given the exclusive right to satisfy demand for air travel between any pair of cities. It chooses a network of connections and a set of prices to maximize profits. Thus, both network design and prices are endogenous. The authors characterize the solution to this optimization problem. Their main result is that, if there are economies of density in the number of individuals traveling between two directly connected cities, the optimal network is either a hub of size n - 1 or one in which every pair of cities is connected directly. Copyright 1995 by The Review of Economic Studies Limited.