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. On nearly 80 percent of the routes in the sample, per-flight charges are socially preferred to per-passenger charges. The small portion (approximately 20 percent) of routes on which per-passenger charges are preferred include the largest routes. Consequently, per-passenger charges become socially preferred from the perspective of total surplus aggregated over all routes. It is also found that when flight frequency is treated as exogenous, the preferred form of charge could be reversed.