"There and Back Again: Airline Routes, Fares and Passenger Flows in Network Equilibria."

We calculate mutual-best-response route networks for profit maximizing airlines serving large US air-traffic-hub cities. A simulated annealing algorithm determines which of over ten thousand potential routes receive direct or hub-and-spoke service. DOT’s Origin and Destination Survey is used to calibrate airline revenue and cost functions. Simulated route structures, airfares, passenger flows, and market concentration levels closely approximate actual US networks comprising over seventy percent of domestic air travel. The results support several controversial positions regarding airline competition. Average airfares by route are consistent with price-taking behavior. Existing industry concentration levels can be justified by cost-reducing economies of scale and scope. Control of multiple airports by individual airlines currently has minimal effects on airfares or passenger flows. Socially optimal route structures would concentrate traffic at fewer and larger airports—but reduce costs only modestly. Airport pricing and capacity can significantly affect network traffic patterns. Investigation of strategic pricing is left for future research.