This study is part of an ongoing project on the economics of airline hub-and-spoke networks. To date, work has focused on how airline fares in an individual city-pair market are related to the characteristics of the hub-and-spoke network serving the market. Empirical findings suggest that, by allowing airlines to exploit economies of traffic density, networks reduce airlines costs and thereby lower the fares charged to passengers. Several extensions of this work are pursued in this project. A version of the model will be estimated where spoke traffic levels replace network characteristics in the regression equation. With economies of density, high traffic levels on the spokes connecting the cities in a given market should lead to low fares. Spoke traffic levels, however, must be treated as endogenous, being determined in part by network characteristics, Second, a structural model of network traffic determination will be estimated that allows the parameters of the airlines cost function to be identified. The estimates should indicate the actual magnitude of economies of traffic density. Finally, the impact of the TWA-Ozark and Northwest-Republic mergers on the fares paid by connecting passengers at the St. Louis and Minneapolis hubs will be estimated. Simulations based on previous empirical estimates suggest that these fares should have fallen in response to the mergers.
