The Price of Airline Frequency Competition

Abstract

Competition based on service frequency influences capacity decisions in airline markets and has important implications for airline profitability and airport congestion. The market share of a competing airline is a function of its frequency share. This relationship is pivotal for understanding the impacts of frequency competition on airport congestion and on the airline business in general. Additionally, airport congestion is closely related to several aspects of runway, taxiway, and airborne safety. Based on the most popular form of the relationship between market share and frequency share, we propose a game-theoretic model of frequency competition. We characterize the conditions for Nash equilibrium’s existence and uniqueness for the two-player case. We analyze myopic learning dynamics for the non-equilibrium situations and prove their convergence to Nash equilibrium under mild conditions. For the N-player symmetric game, we characterize all the pure strategy equilibria and identify the worst-case equilibrium, i.e., the equilibrium with maximum total cost. We provide a measure of the congestion level, based on the concept of price of anarchy and investigate its dependence on game parameters.