sure, you can do that as long as you have traffic rights in respectively between the countries. so if you’re a EU based airline and you want to fly Berlin - Paris - Madrid - Berlin, that would work just fine for all direct and connecting passengers
I think I’ve heard from some fellow airline owners that this type of business model is possible. So for instance if you have a uk based airline and offer the three flight routes LHR-SIN-SYD, LGW-SIN-AKL and MAN-SIN. Then passenger traveliing from the uk onward to australia could change in SIN . So someone could fly from MAN to AKL via SIN. However you are not allowed to carry passengers flying only on the second leg (SIN-SYD, SIN-AKL) since you dont have the traffic rights there.
this is correct. the passengers originating in your home country can connect to the second leg, but no new pax can board it.
and since you will lose a few passangers, that just wanted to go to city B, the connecting flight to city C might not be generating any profits. but that is something you have to try. if you bring in enough pax to city B, you might be able to fill up a flight to C
As others have said, you can certainly do it, and if your price service levels are good enough passengers will book it, however I would recommend either non daily alternating flights to SYD and MEL or signing a code share agreement with an airline flying SYD-MEL.