Review of Industrial Organization
14: 51–64, 1999.
1999 Kluwer Academic Publishers. Printed in the Netherlands.
The Meaning of Size: Output? Scope? Capacity?
The Case of Airline Hubs
RICHARD V. BUTLER and JOHN H. HUSTON
Department of Economics, Trinity University, 715 Stadium Drive, San Antonio, TX 78212-7200
Abstract. 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.
The “size” of a plant seems a simple concept. Yet, depending on the reason for ask-
ing “how big” the plant is, several different deﬁnitions are evoked by economists to
answer that question. Examples include the current volume of output, the short-run
capacity of the plant, and minimum efﬁcient scale. Looking in another dimension,
a measure of scope (“How many distinct products does the ﬁrm produce at this
plant?”) is sometimes needed. And, ﬁnally, for some purposes it is relative size
(measured, e.g., by market share) that is most relevant.
The standard textbook discussion of size speaks of these matters at a high level
of abstraction. Typically the choice of plant size is portrayed as a long-run decision;
it is the combination of ﬁxed inputsthat minimizes the cost of producingthe desired
long-run output. In the short run, ﬁrms are said to choose the mix of variable inputs
that maximizes proﬁts given the set of ﬁxed inputs already in place. Within that
plant, ﬁrms may vary output and capacity utilization (within limits).
The mission of this paper is twofold. First, we aim to provide a deeper under-
standing of the hierarchical relationship which underlies the output, scope and
capacity choices of a ﬁrm. We do this by modeling explicitly the proﬁt-maximizing
calculus of the ﬁrm as it makes long-run and short-run decisions affecting its size.
Though the model arises from the speciﬁc context of the airline industry, in which
a hub serves the function of the plant in the generic textbook discussion, it is in fact
a quite general discussion of these interrelated choices. Second, we use this model
to illuminate some signiﬁcant aspects of airline competition.
We gratefully acknowledge the constructive suggestions of two anonymous referees.