Hidden City Ticketing, Network Structure, and Nash Equilibrium
This article talks about Hidden City Ticketing, the practice of buying an airplane ticket for an indirect flight that goes from city A to city C via a hub B, but getting off at B rather than going all the way to C. If a traveler has the goal of going from point A to point B, it can actually be less expensive to buy the indirect flight (that would have been more total miles if the traveler had gotten off at C) than it is to simply buy a direct flight from A to B. This may seem counterintuitive, but it is a result of market forces driven by the fundamental characteristics of the hub and spoke airline network.
After air travel was deregulated in 1978, airlines looked for more cost-efficient ways to provide flights from anywhere, to anywhere, anytime. Unfortunately, there are not enough people going from, for example, DC to Ithaca to warrant the airline having a direct flight between the two cities. However, there are enough people going from DC to anywhere else, and there are enough people going from anywhere to Ithaca to warrant a number of flights between the two locations and via a hub. This hub and spoke network structure, combined with the fact that there are large fixed costs associated with operating an airline (plane, infrastructure, crew) but much lower variable costs (fuel, maintenance), results in airline ticket prices being subject to two forces that aren’t immediately obvious. The first is simply demand: direct flights are more convenient than indirect flights, and are thus worth more to a customer. The second is competition: let’s say airline X can fly direct from A to B, but airline Y must fly indirectly (for whatever reason). If X and Y’s services were priced the same, a customer would obviously choose X. However, if Y can lower the price of their indirect flight, they will be able to offer a competitive alternative to X’s service. This is counterintuitive, as one would think that making a longer flight should cost more.
The practice of Hidden City Ticketing connects in many ways to topics covered in our course. I find it amazing how simply the hub and spoke structure of the airline network essentially dictates all of the amazing and bizarre resulting outcomes. In addition to network structure, Nash equilibrium and game theory also play a key role in the operation of airlines. As I said before, the price of an airplane ticket is governed both by demand for the ticket (if one customer buys a ticket, he/she increases demand and will raise the price for others) and by the price and worth of competing airlines’ services (the amount airline Y must discount their ticket in order to take some of X’s customers is determined by the quality of X’s service). Each player in the system must take into account what every other player is doing in order to determine what their best strategy is.