Choice of Policy Instruments with Endogenous Quality: Per-passenger and Per-flight Airport Charges in Japan

This study empirically investigates how two types of airport charges (per-passenger and per-flight) differentially affect airfares, service quality (flight frequency), and welfare. A structural model endogenizing airfares and flight frequency is estimated with data on Japanese domestic routes and then used for simulation analyses. The results reveal that per-passenger charges significantly raise airfares, with an average pass-through rate of 97.5 percent, and reduce flight frequency. Per-flight charges decrease flight frequency but have little effect on airfares. The socially preferred type of charges differs across routes: per-passenger charges tend to be socially preferred on larger routes.