Hub and Network Pricing in the Northwest Airlines Domestic System

This paper investigates the “hub premium” hypothesis that major carriers with the major share of traffic in and out of a hub exploit so-called "monopoly power." The hypothesis states that these carriers charge hub-city residents higher fares for travel originating or terminating at the hub than they charge other passengers traveling on the rest of their systems. Some have even gone so far as to claim that consumers living in hub cities live in “pockets of pain.”

By contrast, virtually everyone agrees that consumers who choose to take one stop flights enjoy the full benefits of competition. If a passenger is traveling, say, from Newark to Los Angeles or Seattle and is willing to include a stop in the itinerary, that person has a choice of flying perhaps seven or eight different airlines – including all of the major carriers. Those flying shorter distances, even from Washington to Chicago, have the choice of connecting through cities like Cleveland, Pittsburgh, Detroit, and Cincinnati, rather than going nonstop. This rich array of choices for connecting traffic guarantees a competitive fare to the passenger willing to make a connection.

The surprising result of this study is that the passenger originating or terminating his or her trip in the three major Northwest Airlines hub cities actually enjoys the same competitive fare as the connecting passenger, holding constant the effect of mileage on fares. And yet this study makes no adjustment whatsoever to the benefit to the hub-originating passenger of his or her freedom from the inconvenience or time penalty of connecting or stopping enroute.