EFFICIENCY AND ENTRY IN A SIMPLE AIRLINE NETWORK

Network economies in air transportation raise questions about the scope of the firm, the allocation of costs across passengers, and the susceptibility of a given system to entry. A network that transports given numbers of passengers between three equidistant cities can be defended against entry with constant unit prices. However, if demand is downward sloping, the resulting Ramsey prices may call for passengers flying through a hub to pay more, and these Ramsey-optimal prices may be vulnerable to entry. © 1990.