Airline route structure competition and network policy

This paper studies pricing policies and route structure choices by carriers with market power in a network setting and in the presence of congestion externalities. We account for passenger benefits from increased frequency, passenger connecting costs, airline endogenous hub location and route structure strategic competition. The analysis shows that an instrument directly aimed at regulating route structure choice may be needed to maximize welfare, in addition to perpassenger and per flight tolls designed to correct output inefficiencies. This holds true even when the regulator is does not face any constraint on pricing.