Major U.S. carriers including American and United Airlines operate on a hub and spoke system, offering many frequent connections through their respective hubs. Travelers may prefer one airline to another depending on which hub is more convenient.
a) Suppose that American Airlines were to cut fares on flights to and from its hub at Dallas Fort Worth Airport. Should United Airlines raise or reduce fares at that airport? Please explain why.
b) Compare competition between American Airlines and United Airlines at Chicago O hares International airport, which is a hub for both airlines, and Dallas Fort Worth airport, which is a hub only for American Airlines. At which hub would price competition be more intense? Why?
c) Suppose the strength of traveler preferences over alternative hubs were to diminish. How should airlines adjust their prices? Why?