An integrated multi-depot hub-location vehicle routing model for network planning of parcel service

The paper describes why optimal design of depot and hub transportation networks for parcel service providers makes it necessary to develop a generalized hub location and vehicle routing model (VRM). Analogous problems occur for postal, parcel and piece goods service providers. A generalized hub location and VRM is developed which encompasses the determination of the number, locations of hubs and depots and their assigned service areas as well as the routes between the demand points and consolidation points (depots, hubs). Because this task leads to a very complex transport design problem, a heuristic solution concept has to be developed. The applicability to a case study is demonstrated; the case of completely new system configuration for Austria is considered. Management must simultaneously decide the number, location, service areas and routes from demand points to depots and vice versa (the pickup and delivery structure) as well as the number and locations of hubs and the routes of depot–hub and hub–hub transports (the hub location or line haul structure), The developed management support decision model leads for real cases to a tremendous number of some million binary variables as well as continuous variables and million of constraints.     

The Meaning of Size: Output? Scope? Capacity? The Case of Airline Hubs

The size of a production facility has different specific meanings depending on the nature of the business decision at issue. We present a general theoretical model illustrating the profit-maximizing firm's interrelated choice of plant size in long-run, medium-run and short-run contexts. The model is then estimated for U.S. airline hubs. The results suggest that competition operates primarily via the capacity (long-run) size decision. A game-theoretic simulation based upon the results is consistent with the argument that the smaller of two hubs sharing an airport is at a significant competitive disadvantage.     

Organizational performance in a regulated environment: The role of strategic orientation

This study explores the influence of governmental regulation on organizational strategies and performance outcomes. Drawing on literature in strategic management, we provide a longitudinal empirical analysis of viable strategies in the U.S. domestic airline industry during a 6-year period (1965-70) when it was regulated by the Civil Aeronautics Board. Results indicate that air carriers were indeed able to articulate coherent strategic postures despite regulatory constraints, and were thus able to influence profitability.     

Barriers to Mobility in Europe's Civil Aviation Markets: Theory and New Evidence

A questionnaire-based survey is applied to investigate the perception of mobilitybarriers by European airline managers. Whilst the liberalisation of Europe's airline markets removed regulatory mobility barriers, we find that mobility impediments still appear to exist. Potential entrants moreover, perceive some mobility barriers as significantly more effective than others. The perceived effectiveness of a particular mobility barrier varies considerably among airline managers. We also provide an overview of previous studies on the contestability hypothesis and the effectiveness of endogenous (strategic) mobility barriers. Our results support earlier findings for the U.S. to the effect that barriers to mobility are perceived to exist and matter. Whilst our results are clearly subjective, as they are based on the perceptions of managers, we believe such perceptions matter as they inform managerial actions. In this sensewe believe our results are of value.     

Competition and Service Quality in the U.S. Airline Industry

The U.S. government, media, and flying public have expressedgreat concern in recent years over both airline market concentration and flightdelays. This study explores potential connections between the two by examining whetherthe lack of competition on a particular route results in worse on-time performance.Analysis of data from the U.S. Bureau of Transportation Statistics in 2000 indicatesthat both the prevalence and duration of flight delays are significantly greater onroutes where only one airline provides direct service. Additional competition iscorrelated with better on-time performance. Weather, congestion, and schedulingdecisions also contribute significantly to explaining flight delays.     

The competitive consequences of hub dominance: A case study

Hub-and-spoke has become the predominant configuration of airline routes, with individual hubs typically dominated by single carriers. These operations have characteristics of natural monopoly; but dominance is a consequence also of advantages that cannot be subsumed under the rubric of superior efficiency. The carrier with the strongest presence attracts a grossly disproportionate amount of traffic and, secondarily, of the high fare-paying traffic originating at the hub. While the welfare consequences of the consequent price discrimination are ambiguous, United's acquisition of 50 additional slots at the slot-constrained O'Hare airport raised a legitimate Clayton Act Section 7 issue.Robert Julius Thorne Professor of Political Economy, Emeritus, Cornell University; Special Consultant, National Economic Research Associates, Inc. I acknowledge with gratitude the indispensable assistance of Gary J. Dorman in assembling the data presented here and offering criticisms, and of Scott Thomas. They bear no necessary responsibility, however, for the article itself.     

An empirical model of entry and exit in airline markets

This article considers the effect of airline hub-and-spoke systems on the entry and exit behavior of rival firms in the U.S. airline industry. An analysis of simple entry and exit decisions provides insight into equilibrium conditions that are used to specify discrete choice econometric models. The empirical evidence indicates that hub-and-spoke network characteristics are significant determinants of entry and exit decisions in individual citypair markets.     

Price discrimination through refund contracts in airlines

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.     

The Impact of Mergers on Quality Provision: Evidence from the Airline Industry

We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on‐time performance (OTP). We find that airline mergers have minimal negative impacts on OTP, and likely result in long‐run improvements due to efficiencies. Importantly, we show that this finding is not driven by post‐merger changes in price that could affect OTP. Consequently, at least in the case of airlines, policymakers should not, as a rule, fear the negative quality effects of mergers.     

Conceptualizing digital and physical connectivity: The position of European cities in Internet backbone and air traffic flows

‘Digital’ telecommunication flows and ‘physical’ corporeal flows provide researchers with comprehensive indicators of the economic interactions between cities. However, previous research drawing on telecommunication-based measures of inter-urban connectivity has been hampered by inadequate conceptualizations and data. This paper draws on this observation to devise a new approach for measuring inter-urban connectivity based on a city’s insertion in Internet backbone networks. The straightforward example of air transport flows is thereby used to outline this approach. To investigate telecommunication and air passenger flows, use is made of European statistics on Internet eXchange Points and the MIDT airline database respectively. The approach is illustrated through a systematic comparison of the position of European cities in both types of networks. It is found that European cities assume largely similar hierarchical levels in terms of digital and physical information flows, albeit that the digital connectivity of centrally located European cities is often somewhat higher than that of peripheral cities with a similar levels of physical connectivity.     

Do low-quality products affect high-quality entry? Multiproduct firms and nonstop entry in airline markets

This paper studies the effect of product ownership and quality on nonstop entry in the airline industry. Specifically, this paper empirically examines the decision of an airline to offer high-quality nonstop service between cities given that the airline may or may not be offering lower quality one-stop service. I find that airlines that offer one-stop service through a hub are less likely to enter that same market with nonstop service than those that do not. In addition, the quality of the one-stop service is an important determinant of entry. Airlines are more likely to enter a market with nonstop service if their own or their rival's one-stop service in the market is of lower quality. Estimates suggest that the entry of a rival nonstop carrier diminishes the probability a carrier enters the market with nonstop service. However, airlines offering one-stop service respond differently to nonstop rivals. In particular, relative to other carriers, those offering one-stop service are more likely to enter markets if there are nonstop rivals, suggesting that cannibalization effects are diminished in the presence of nonstop competition.     

Reciprocal threats in multimarket rivalry: staking out ‘spheres of influence’ in the U.S. airline industry

The paper investigates the outcomes of multimarket competition among U.S. scheduled airlines when the interests and positions of the airlines differ in the mutually contested markets. Asymmetry in territorial interests provides multimarket competitors with footholds in important markets of their rivals, which can be used to deter the behavior of the rivals in other markets. Evidence suggests that airlines use footholds in their rivals’ important markets (particularly in their hubs) to reduce the competitive intensity of those rivals in the airlines’ own important markets (their hubs), and sustain their dominant positions (or spheres of influence) in those markets. Copyright© 1999 John Wiley & Sons, Ltd.     

Publication of Information and Market Response: The Case of Airline on Time Performance Reports

This paper investigates market response to publication of on time performance information. Theory suggests that reduction in search costs generates more honest airlines and better quality service, a distribution of price-quality bundles, increased demand, exit by inefficient airlines and reduction of price rigidity. An ARIMA study of U.S. domestic airline operations finds that after publication of performance information the market generated better performance, increased quality distribution, enhanced demand, exit by four of fourteen airlines and reduced price-quality rigidity. Publication of information may improve performance in markets characterized by asymmetric information and high search costs.     

Location,governance, and strategic determinants of japanese manufacturing investment in the united states

A firm's decision to manufacture abroad depends on location, governance, and strategic factors. Governance factors are firm-specific. In spite of this, most empirical studies of foreign direct investment (FDI) have been conducted at the industry level (making it impossible to look at firm-specific determinants), and only a handful have considered governance, location, and strategic factors simultaneously. This paper is the first large sample study of the determinants of foreign direct investment at the product and firm-level. It examines the impact of location and governance factors, and of four types of strategic interactions, on a Japanese firm's propensity to manufacture in the U.S. The results support the view that foreign direct investment is explained by location, governance, and strategic variables. Economies of scale and trade barriers encourage Japanese FDI in the U.S. The larger a Japanese firm's R & D expenditures, the greater the probability it will manufacture in the U.S., but this is not the case for advertising expenditures. Some strategic factors are also important: Japanese firms with medium domestic market shares have the highest propensity to invest in the U.S. There is evidence of follow-the-leader behavior between firms of rival enterprise groups, but none of ‘exchange-of-threat’ between American and Japanese firms. Japanese investors are also attracted by concentrated and high-growth U.S. industries.     

The economics of international codesharing: an analysis of airline alliances

International airline alliances allow airlines to coordinate their operations in providing international service. This paper analyzes the effect of such alliances on traffic levels, fares, and welfare. In the model, the benefits of alliances arise because cooperative pricing of trips by the partners puts downward pressure on fares in the interline city-pair markets (these are markets where travel on both carriers is necessary). The loss of competition in the interhub market, which connects the hub cites of the partners, generates a countervailing effect, tending to raise the fare in that market. While the presence of economies of traffic density complicates these impacts by generating cost links across markets, simulation analysis shows that the above tendencies typically prevail. Welfare analysis shows that both consumer and total surplus typically rise following formation of an alliance despite the harm to interhub passengers, suggesting that the positive effects of alliances may outweigh any negative impacts.     

Price dispersion in a market with advance-purchases

This paper examines price discrimination in a market where consumers learn their preferences over time. The products are perfect substitutesex ante, but there is horizontal differentiationex post. Air travel provides one example of such a market. In equilibrium, there is more price discrimination under duopoly than under monopoly, which is consistent with recent empirical evidence from the U.S. airline industry.I am grateful to Tom Holmes for many discussions on related topics.     

Network Structure and Airline Scheduling

This paper provides a simple analysis of the effects of network structure on the scheduling, traffic, and aircraft size choices of a monopoly airline. The analysis shows that switching to a hub-and-spoke network leads to increases in both flight frequency and aircraft size, while stimulating local traffic in and out of the hub. In addition, HS networks are shown to be preferred by the airline when travel demand is low, when flights are expensive to operate, and when passengers place a high value on flight frequency but are not excessively inconvenienced by the extra travel time required for a connecting trip. The welfare analysis shows that the flight frequency, traffic volumes, and aircraft size chosen by the monopolist are all inefficiently low under both network types. Moreover, in the most plausible case, the monopolist's network choice exhibits an inefficient bias toward the HS network, apparently reflecting an excessive desire to economize on the number of flights.     

Quality disclosure when firms set their own quality targets

We investigate how firms adjust their target quality levels when they - or their competitors - become subject to an information disclosure requirement. Our setting is the U.S. airline industry, where all large domestic carriers are required to report their on-time performance (OTP). OTP is measured by comparing a flight’s actual arrival time to its scheduled arrival time, which is chosen by the airline. Therefore, airlines can improve their OTP by simply increasing their scheduled flight times. We study three airlines which become subject to the disclosure requirement and find that they lengthen their schedule times by 1.4 min on average. Moreover, other airlines also increase their schedule times on routes where they compete with newly reporting airlines, by about 2.3 min, while actual flight times remain unchanged. While these numbers are small, the longer schedule times translate into a 15% improvement in OTP for previously reporting airlines. We conclude that newly reporting airlines and their direct competitors adjust their quality targets when they become subject to quality disclosure, which improves their reported quality without improving the actual time that it takes to travel from gate to gate.     

Global corporate competition: Who's winning,who's losing,and the R&D factor as one reason why

This study summarizes the major changes over the period 1960–86 in the shares of world markets of the world'S leading American, European and Asian corporations based in 15 major industries. It relates the differential sales growth rates of the gaining and losing firms to national trends in industrial competitiveness, to employment change and to long-term returns to shareholders. One principal determinant of firms' global growth rates, and thence gains and losses in ‘world market share’, corporate research and development (R&D) intensity, is examined and tested on an 83-firm, six-industry subset of the overall data base. The proportion of corporate sales revenues allocated to commercially oriented R&D emerges as a, perhaps the, principal indicator of subsequent sales growth performance relative to competition over 5–10-year periods. Insofar as many U.S. and U.K. firms have lost global market share relative to Asian and European competitors over the past two decades, a significant contributory factor would appear to have been negligence on the part of many U.S. and U.K. firms of investment in technology as a factor determining strategic, competitive advantage.     

Product variety,sourcing complexity,and the bottleneck of coordination

Research summary: This paper studies the coordination burden for firms that pursue variety as their main product strategy. We propose that product variety magnifies the tension between scale economies in production and scope economies in distribution, giving rise to complex sourcing relationships. Sourcing complexity worsens performance and poses a dilemma for organization design: A hierarchical structure with intermediate coordinating units such as sourcing hubs reduces sourcing complexity for downstream distribution but creates bottlenecks at the hubs, hurting performance for both the hubs and downstream distribution. We empirically examine operations data for about 300 distribution centers within a major soft drink bottling company in 2010–2011. Results support our hypotheses, illuminating the source of complexity in multi‐product firms and the challenge for organization design in managing complexity. Managerial summary: This paper uses data for about 300 distribution centers within a major soft drink bottling company to study how a large product variety creates complex sourcing networks. We find that, in addition to poor performance (e.g., increased stockouts), complex sourcing networks can cause challenges for organization design. In particular, the benefits of converting an existing distribution center into a sourcing hub (i.e., reduction in sourcing complexity for downstream distribution) and the costs of doing so (i.e., reduction in performance for both the hubs and downstream distribution) are both real and significant. The design of an efficient sourcing network despite its complexity involves important managerial decisions. Experiences in building and managing such networks can be the basis of a dynamic capability. © 2016 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.