Transportation industries in general, and the airline industry in particular exhibit different types of networks compared to networks analyzed in previous the chapters. Whereas the markets for hardware, software, and information are characterized by having consumers whose preferences exhibit network externalities, transportation industries are characterized by having producers whose production technologies exhibit economies of networks. These production networks are composed of the large number of routes and alternative routes in which passengers can be transported from cities of origin to cities of destination.

By definition, the service provided by a transport firm is the physical movement of passengers and freight from one point in geographic space to a second point in geographic space. This particular characteristic of transportation services implies that the creation of route structures involves establishing transportation networks on which passengers and cargo are transported. Despite the fact that most types of transportation industries (e.g., airlines, railroad, buses, and marine) exhibit economies of networks, we chose to deal exclusively with the airline industry since both in the United States and in the European Community this industry was exposed to rapid changes due to intensive programs of deregulation which ultimately led to the complete absence of price and entry controls (see Viscusi, Vernon, and Harrington 1995, Ch.17; Doganis 1993).

Section 9.1 starts out with the definition of the physical networks commonly used by airline firms to transport their passengers and the cost implications of using the various route networks. Section 9.2 investigates the impact of the deregulation of the airline industry, on the network structures, and on airfares.