Paul Dudley

Pricing and Welfare Implications of Alternative Approaches to Setting Price Controls in the Postal Sector

Within the postal sector, price controls are being developed and set to limit the scope for a universal service provider (USP) to increase prices and to provide incentives for improvements in cost efficiency (Correia da Silva et al, 2004). The provision of universal postal service, including setting geographically uniform prices within a country or member state, is an overriding requirement for the development of any policy decision in the postal sector, including that of setting of a price control. Further, some countries have moved away from a monopoly provision of postal service to one that is open, to varying degrees, to competition. The optimal structure for price controls within the economics literature is that of a global price cap (GPC) (see (2003) and the references mentioned there), where all goods provided by the regulated firm are included in the computation of the price cap. This familiar result arises under conditions where a regulator is assumed to seek to maximise welfare while a regulated business maximises its profit and leads to optimal prices that are based on a mark-up on marginal costs. While GPC is the optimal structure for a price control also in the presence of competition, regulators have looked at alternative structures and approaches, at least in part as a means of facilitating or promoting competition. For example, some have considered removing services that are deemed to be competitive from the coverage of the control (Dudley et al, 2005).

Welfare and Pricing of Mail in a Communications Market

We build a model where a postal incumbent offering single piece, transactional and advertising mail competes with postal entrants and with a firm offering an alternative medium. We solve for the optimal prices under various competition assumptions. We calibrate the model and provide numerical simulations in order to shed light on the impact of these assumptions on volumes and welfare levels.

Optimal Pricing of Mail in the Transactional Market and Welfare for the Wider Communications Market

The traditional bulk mail market can be thought of as serving business communication needs with other businesses and customers, and includes transactional and advertising mail, as distinct from single piece mail. Through transactional mail the sender is able to meet its obligation of providing information to the recipient (examples including banks’ statements and utilities’ invoices). However, transactional mail can also be seen as one of several alternative media for financial institutions to communicate to their customers. Within this wider communications market, the financial institutions can and have started to develop internal profit centers in Europe to charge for their transactional activities. Such centers may form only one part of financial institutions’ overall profits and are investigated alongside the need for the universal service provider to break even and therefore within a wider communications market than just the mails’ market (but not within an even wider context of the financial institutions’ overall profits).

Optimal Pricing for Mail and Welfare Implications in a Communications Market

This compilation of original essays by an international cast of economists, regulators and industry practitioners analyzes some of the major issues now facing postal and delivery services throughout the world as competition from information and communication technologies has increased.

Competition through Downstream Access in the UK Postal Sector: The First Four Years

Regulation continues to be an important issue in the postal and delivery sector of the global economy. This latest volume of the series covers progress made in the competitive agenda in the industry. It is global in scope and addresses topics of great importance to scholars and practitioners of postal regulation and public sector economics.

A Panel Data Analysis of Inefficiency and Heterogeneity in the Postal Sector

This compilation of original papers selected from the 19th Conference on Postal and Delivery Economics and authored by an international cast of economists, lawyers, regulators and industry practitioners addresses perhaps the most significant problem that has ever faced the postal sector – electronic competition from information and communication technologies. This has increased significantly over the last few years with a consequent serious drop in mail volume.

The Effect of Unobserved Heterogeneity in Stochastic Frontier Estimation: Comparison of Cross Section and Panel with Simulated Data for the Postal Sector

In this paper, we examine the application of SFA method with time-invariant inefficiency and assess its estimation of inefficiency when applied to cross section and panel data. By using simulation methods, we look at the effect of unobserved heterogeneity on the estimates of inefficiency in both cross section and panel. In the presence of unobserved heterogeneity and significant variance in the inefficiency term, stochastic frontier estimation of inefficiency can be significantly different in panel and in cross section. This finding accords with analysis of actual data from the postal sector. We then suggest an estimation method for cost frontier when inefficiency is time-invariant and with unobserved heterogeneity.

Price Controls in the Postal Sector: A Welfare Analysis of Alternative Control Structures

Postal regulators set price controls in order to simultaneously ensure the provision of the universal service, promote competition and equity. We study the associated price control procedures in a model where the universal service provider offers both a single piece product and a business mail product and where entrants offer a bulk mail product. Our results from the numerical calibration of our model indicate that in the case where entry is confined only to access, a range of procedures appear capable of meeting these objectives. However, if bypass is available these trade offs become more costly.

Competition and the Coverage of Price Controls in the Postal Sector

This paper has reviewed the conditions necessary for services to be removed from price controls for the postal sector, consistent with the present regulatory environment in the UK. In particular, it has developed the approach used by UK regulators outside of the postal sector into one that places more emphasis on testing whether a market is likely to be prospectively competitive within the price-control period. First, the assumptions used by the USP in its forecasts for the price-control period can be assessed to see if they are consistent with there being no significant market power for any service within that period (Test A). In particular, the paper illustrates with an example of magazine mail how the critical demand elasticity values could be derived from the USP business plan for comparison with actual values in assessing whether Test A is satisfied. Second, the observations of the market can be used to confirm whether the USP’s forecasts contained in the business plan are indeed reasonable and compatible with the developments of the market (Test B). The removal of services then requires costs to be allocated between competitive and non-competitive markets to enable the coverage of the main control to shrink over time as the competitive market develops.

RPI - X Price Control Regulation in the Postal Sector*

In the European Union (EU) the retention of the postal universal service and the continued financial viability of at least one universal service provider (USP) in each state is a statutory requirement. In each European state there is currently only one postal USP.