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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 per cent, 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. I. INTRODUCTION BECAUSE THE AIRLINE INDUSTRY IS AN ESSENTIAL INFRASTRUCTURE forlong-distance transportation, 1 fares and service quality in the industry have widespread influence on the economy. They are likely affected by airport charges, which are usually paid by airlines to airports and account for a relevant share of airlines' operating costs: approximately 5.9 per cent for airlines *This work was partly carried out when the author was at Sapporo Gakuin University. I thank the Editor for helpful guidance. I am grateful for the helpful comments and suggestions by the two anonymous referees, Nobuo Akai, Achim I. Czerny, Akio Kawasaki, Ming Hsin Lin, Jun Nakabayashi, and participants at many conferences and seminars. I also thank Shingo Yamazaki for his help in calculating the derivatives of the demand function.

The national treatment obligation, along with the most favored nation obligation, is an important principle of non-discrimination adopted by the World Trade Organization. It requires that foreign products be treated no less favorably than national products. This paper empirically examines the 1996 WTO recommendation that a Japanese distilled alcoholic beverage, shochu, be classed as a "directly competitive or substitutable product" with regard to other distilled drinks, and thus that not taxing similarly be in violation of its national treatment obligation. Demand estimates obtained from a random-coefficient discrete-choice model reveal that a substitution pattern of shochu is far more complicated than that presumed by the WTO. Upon the WTO recommendation, Japan made all distilled alcoholic beverages be taxable at the same level in 2000. Our simulation analysis indicates that the revised tax rates improved but did not maximize Japanese national welfare.

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