THE ECONOMICS OF HUBS - THE CASE OF MONOPOLY

In this paper, we study the optimization problem of an unregulated air carrier which 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. We characterize the solution to this optimization problem when demands and costs are symmetric. Our main result is that, if there are economies of density in the number of individuals travelling 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.