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

Abstract

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).

The analysis contained in this paper reflects the views of the authors and may not necessarily be those of Royal Mail Group.