Cooperation and competition to design a point-to-point airline network under regulation for a new entry

Abstract

In this paper, we propose a point-to-point airline network design model where a new company plans to enter a market to maximize its revenue under a regulation. The presented model prevents the entrant company from developing a route that may drastically reduce the existing company’s revenue. Under this restriction, the entrant company considers cooperation and competition with the existing companies when entering the market. We use a hub connection cost, which is the required cost for passengers when they transfer to other routes, to represent various levels of cooperation. Small hub connection cost means cooperative relations between the companies. We also incorporate the path’s attractiveness that shows how attractive it is for passengers, depending on the hub connection cost and how it detours compared to a non-stop path between the origin and destination of the path. If a path is not sufficiently attractive, passengers do not use it, which causes revenue reduction. Hence the entrant company requires to find an optimal strategy, i.e., cooperative or competitive relations to be developed with the existing company, to maximize its revenue. We formulate the model as a 0-1 integer programming problem and obtain optimal solutions using optimization software. From computational results using the standard CAB hub location data set, we observe that the results greatly depend on the existing company’s network; however, cooperative relations and a certain de-regulation achieve the total revenue increase by developing an attractive network.

Keywords

• airline network design
• point-to-point network
• hub-and-spoke network
• competition and cooperation