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 an d prices are endogenous. We characterize the solution to this optimiza tion problem when demands and costs are symmetric. Our main result is that, if there are economies of density in the number of individuals t ravelling between two directly connected cities, the optimal network i s either a hub of size n - 1 or one in which every pair of cities is c onnected directly.