Network effects, heterogeneous time value and network formation in the airline market

This study examines an airline firm's adoption of a hub-spoke network or a point-to-point network when considering network effects from the demand side and the heterogeneity of passengers' time value. The results of this study reveal the following: If the time value for leisure passengers is sufficiently small and the operating cost is medium or when the time value for leisure passengers is high and operating cost is small, the monopoly airline adopts a hub-spoke network. Otherwise, a point-to-point network is adopted. Moreover, even when the airline chooses a point-to-point network, business passengers might move via another city according to second-degree price discrimination.