New Business and Regulatory Strategies in the Postal Sector

Frontmatter

Postal Operators as “Ground Based” Online Platforms?

Abstract

In the last 10–15 years the Internet has severely impacted the postal and delivery market: the volume of letters declined, the need for parcel delivery increased, the costumers’ needs changed. Postal Operators (POs) have started diversifying their businesses and delivery services companies have updated and readdressed their quality of service and their offers.

The aim of this paper is to understand whether POs could ri-converge in the direction of reinventing their business models in the digital era, i.e., if it is possible and/or convenient a radical change of POs, evolving from offline intermediaries toward a new form of ground-based/online intermediaries.

Paula Gori, Pier Luigi Parcu

Inducing Optimal Quality Under Price Caps: Why, How, and Whether

Abstract

Quality of postal service is of concern around the world, and was a subject of proceedings in the US to assess the performance of price-cap regulation (PCR) of “market-dominant” services. Although PCR does not imply minimizing quality, work by Sappington implies that quality will be below the optimal level at the regulated price. Mechanisms to get regulated firms to internalize this quality externality, consistent with information limitations justifying PCR, provide no benefits to postal customers. Negotiated arrangements between a postal operator and its regulator to set and incentivize quality of service are likely the best available option.

Timothy J. Brennan

Challenges of Regulating Quality of Service in the Postal Industry

Abstract

Quality of service (QoS) is one of several regulatory objectives that authorities oversee. The EU Postal Directive, on the issue states: “Member States shall ensure that quality of service standards are set and published in relation to universal service in order to guarantee a postal service of good quality”. Subsidiarity is key, since the specification of domestic QoS regulation is left to individual countries.

Henrik Ballebye Okholm, Bruno Basalisco, Anna Möller Boivie, Jimmy Gårdebrink

Creating Last-Mile Incentives from Inside-Out. A Template Drawn from Rural Telecom

Abstract

On December 1, 2017, the Postal Regulatory Commission (PRC) issued a Notice of Proposed Rulemaking in which it concluded that the rate-making system had not maintained the financial health of the Postal Service and that service quality had deteriorated. The aim of this article is to offer a novel supplement to the PRC’s incentive program that grew out of the author’s experiences in the telecommunications industry. In the absence of external pressure, internal incentives are an important starting point for developing a framework to attract private capital and management at reasonable prices. The basic strategy offered here is to organize competing service territories within the Postal Service into subsidiaries and award bonuses tied to superior performance that go beyond service delivery standards now in place. A further recommendation is to develop a “best practices” simulation model that can be used to fine-tune internal benchmarks and to set minimum bid prices for operating service territories in case the Postal Service decides to subcontract with the private sector or spin off service territories to the private sector.

Victor Glass

Crowdsourcing the Last Mile

Abstract

Crowdsourced ridesharing companies, such as Uber, have recently made moves to expand into last-mile package delivery, setting up a competitive struggle between them and the national hub-and-spoke companies (NHC). Crowdsourced ridesharing platforms have achieved significant penetration of the passenger service industry. They have done so through constructing a two-sided platform linking consumers seeking rides with independent drivers and have avoided investing in a large physical network. In this paper, we model the interaction between contending suppliers in the same day delivery network, incorporating the scale and scope economies inherent in an NHC local delivery and the two-sided platform characteristics of ridesharing providers. Conditions under which ridesharing providers can successfully complete with NHCs include a high value placed on rapid delivery and significant cost complementarity enjoyed by passenger and delivery services.

Michael D. Bradley, Jeff Colvin, Mary K. Perkins

Lessons from Other Network Industries: Should Posts Seek to Collaborate More in the Last Mile?

Abstract

While other network industries have developed cooperative models to share costs and reduce excess capacity, the postal sector is not a typical network industry. Postal operators (POs) face unique challenges compared to other network industries in the last mile such as competition and entry for parcels, unlike the monopolies that protect firms in other industries. This chapter examines the drivers behind cooperative models in other network industries to better understand whether POs have an opportunity to collaborate within last mile ecosystems even though the competitive environments and networks themselves are wholly different from other networks who have adopted such approaches. It offers suggestions on models the postal sector could follow to create and help facilitate this coordination and collaboration, and what conditions might need to exist for them to succeed.

Adam Houck, Bernhard Bukovc

Consolidation in Urban Logistics: What Could We Learn from Past Experiences and Economy Theory?

Abstract

Issues related to sustainable urban or city logistics, i.e., the movement of goods within cities, are not new. However, attention on last mile delivery inside cities is growing and all different types of stakeholders are seeking solutions to optimize it. Promoting co-opetition between last-mile service providers and the use of mutualized infrastructures (buildings, vehicles, and so on) could be an efficient solution. To be successful such cooperative schemes must result from voluntary agreements between stakeholders resulting from a “meeting of minds”. Nevertheless, public authorities have an active role to play in order to put in place a favorable playing field by for instance, granting stakeholders antitrust immunity or giving specific rights to operators who collectively manage an UCC or by providing them well-placed premises where flows could be consolidated.

Claire Borsenberger

Design and Enforcement of Compensation Funds After Confetra: A Legal and Economic Analysis

Abstract

This paper looks at the design and enforcement implications for the compensation fund in the postal sector as a result of the recent ruling of the Court of Justice (“the Court”). In DHL Express (Austria), the Court gave its interpretation of the scope of the obligation to contribute to the compensation fund under Article 9 of the Postal Services Directive. The most recent Confetra case confirms along the same line of reasoning that there is, in principle, nothing to prevent a Member State from making the grant of general authorizations conditional on the obligation to contribute to the compensation fund.

Alessandra Fratini, Marc Chovino

Is the Compensation Fund an Appropriate Tool for Financing Universal Postal Service Obligations?

Abstract

This chapter discusses pros and cons of the compensation fund in the postal industry, envisaged in the European directive as an alternative measure to a state subsidy for financing universal service obligations. The fund is a tax charged only to competitors for sharing these costs. Its application conflicts with general normative principles required for making a tax socially efficient, as the benefit principle, the competitive neutrality and the solidarity principle. Their respect makes its tax base and rates definition very problematic, especially with regard to multisided e-commerce parcel markets. The chapter provides a positive explanation for why governments, regulators and national providers may be interested in enacting the fund.

Vincenzo Visco-Comandini

Compensation Fund in Postal Service: A Step Forward After the Polish Case

Abstract

European Commission with the Decision SA.38869 (2014/N) has approved the Compensation Fund (CF) as a mean of financing the universal service net cost in Poland. In the light of this Decision, the paper examines firstly the features of a fair CF then the products of the universal service among different Countries, with a special focus on parcels and express courier. In the next section it is analyzed the difference between the parcel and express courier shipments in the light of prevailing market definitions in EC Decisions. As e-commerce shipments are boosting, the research also examines their characteristics and their eligibility to contribute to the CF. The paper concludes with a possible way forward after the Polish decision.

S. Romito, S. Gori, A. Rovero

Open-Data: A Solution When Data Constitutes an Essential Facility?

Abstract

Thanks to appropriate data algorithms, firms, especially those on-line, are able to extract detailed knowledge about consumers and markets. This raises the question of the essential facility character of data. Moreover, the features of digital markets lead to a concentration of this core input in the hands of few big “superstars” and arouse legitimate economic and societal concerns. In a more and more data-driven society, one could ask if data openness is a solution to deal with power derived from data concentration. We conclude that only a case-by-case approach should be followed. Mandatory open data policy should be conditioned on an ex-ante cost-benefit analysis proving that the benefits of disclosure exceed its costs.

Claire Borsenberger, Mathilde Hoang, Denis Joram

Vertical Integration in the E-Commerce Sector

Abstract

We study vertical integration of a retailer and an operator in the e-commerce sector. Its impact on consumers involves a tradeoff between competition and double marginalization. The competition effect dominates when the number of independent retailers and operators is sufficiently large. Even when integration of a single retailer-delivery operator pair is initially welfare improving, the resulting market structure may not be sustainable and result in an integrated monopoly that is welfare inferior to the initial independent equilibrium. Multiple integration is typically welfare superior to the integration of a single retailer-delivery operator pair. Integration is more likely to have an adverse effect on welfare when the integrated firm delivers only to rural customers.

Claire Borsenberger, Helmuth Cremer, Denis Joram, Jean-Marie Lozachmeur

Prices and Conditions of Access to the Postal Network: The Principle of Non-Discrimination

Abstract

Access to an incumbent postal operator’s (PO) delivery network is an instrument for promoting competition in the postal services market. Competition should create more choices for postal users, reduce prices and improve quality. However, compared to other network industries, the postal sector has numerous differences including low sunk costs, the questionable applicability of a “ladder of investment” theory, and a reduced risk of market failure. In addition, the letter market is declining and thus becoming less attractive for new entrants. Therefore, positive effects of (mandatory) access to the postal network should not be presumed. Access to the PO’s network is not only provided to alternative postal operators but also to businesses, bulk mailers, consolidators and other entities that provide services involving mail preparation and/or carrying out part of the distribution process. POs often offer rebates, most typically based on volume and operational work-sharing and presorting activities.

Til Rozman

The Impact of Increasing Competition for Non-Contract Parcels on Postal Prices and Efficiency Decisions

Abstract

The increase in e-commerce and demand for parcels has provided universal postal operators (USPs) with an opportunity to counter-balance, to some extent, declining letter volumes. However, as parcel markets have expanded this has exposed some USPs to increasing competition in the single-piece parcel traffic segment in which historically they have tended to dominate. This chapter develops and calibrates a theoretical model to assess postal USPs’ finances resulting from the trade-offs they face between efficiency gains and pricing, when operating in such an environment within a regulatory framework. Our results indicate that increasing competition in the parcel market can create added uncertainty and may require higher letter price caps to allow the USP to break even. Sensitivity analysis shows that external shocks can have a substantial impact on the USP’s financial position and fixed pre-determined price caps can impose a significant constraint on the USP’s ability to achieve a normal rate of return.

Philippe De Donder, Frank Rodriguez, Soterios Soteri

Disoriented No More: An Economics Compass for the EU’s Cost Orientation Principle

Abstract

Postal incumbents across the world are often subject to price-cost rules. The motivation for our paper is the discussion within the EU and elsewhere of this relationship, against a backdrop of a somewhat ambiguous framework and uncertain and diverging implementation of regulatory price-cost tests.

Henrik Ballebye Okholm, Mindaugas Cerpickis, Bruno Basalisco

How Price Sensitive Is Letter Advertising Mail in the UK?

Abstract

The share of advertising expenditure going to letter mail has been declining for many years. While this has mainly been due to an increasing focus on digital advertising spend other factors, such as the price of letter mail, are also important. In order to help inform advertising letter mail pricing strategies this chapter provides price elasticity estimates conditional on customers using Royal Mail retail advertising products. The overall price elasticity estimated for this customer group was around −0.7 but tended to increase in absolute value by customer size and vary substantially by industry sector. For example, customers operating in the Finance and Insurance and Utilities sectors were estimated to be highly sensitive to price movements with estimated price elasticities of −1.5 to −2.6 respectively. Additional analysis was undertaken for customer sub-samples. However due to potential issues related to selection bias these results should be viewed as directional in nature and subject to further research.

Frédérique Fève, Thierry Magnac, Leticia Veruete-McKay, Soterios Soteri

Brand, Product Differentiation and Postal Market Outcomes

Abstract

Letters markets were opened to full competition by 2011 in most EU countries. We can thus observe some market outcomes post liberalization: the broad picture suggests that customers have been somewhat sticky. In this paper, we use a differentiated Bertrand economic model—typically used for merger simulation—to assess possible factors that affect the development of competition in post. This model captures the apparent characteristics of different postal products markets based on evidence of current market outcomes and can assist policy makers in evaluating policies and assessing the strength of some determinants of market outcomes, such as product differentiation and possibly relative strength of the brand of the incumbent.

Isabelle Carslake, George Houpis, Ellie Monaghan

E-Government: A Curse or an Opportunity for Posts?

Abstract

Worldwide a lot of countries have been engaged in e-government but investments in e-government policies differs among countries. Nevertheless it is possible to identify leader countries and key factors of success in implementing e-government policies. The establishment of e-governments can appear to be detrimental for postal operators. Indeed, these policies imply digitalisation of some administration processes which are harmful to traditional mail activities. However, this article shows that postal operators are playing an active role in the success of e-government policies by widening public access to internet and favouring digital literacy, or by providing digital tools allowing a wide and secure use of e-government procedures and by supporting Governments ‘ambitions. Consequently it seems that e-government is an opportunity for them.

Blandine Eggrickx, Olaf Klargaard, Marine Lefort, Philippe Régnard

Relating Postal Activity to the Business Cycle by Linear Regression with Integral Equations

Abstract

We relate the cyclical components of USPS volumes and revenues per piece to a coincident indicator of the business cycle. The relationships are represented as linear integral equations and fit employing specialized algebraic methods. Our technique yields OLS estimates in the form of continuous coefficient functions spanning three years. In general, we find that USPS volumes and revenues respond to business conditions as expected but with diverse timings. However, our fits do not explain a high percentage of the variation in the cyclical component of any postal time series. Overall, U.S. postal activity does not appear to be strongly related to the business cycle.

Katalin K. Clendenin, Soiliou D. Namoro, Edward S. Pearsall

To What Extent Has E-Substitution Impacted the Demand for Letters and Which Factors Are Constraining Its Advance

Abstract

The demand for letters is in decline because of electronic (e)-substitution. However, there is limited published information on the detail and extent to which the cumulative impact of e-substitution has reduced letter volumes. This chapter provides estimates of the degree to which e-substitution has reduced the demand for B2C business letters in the UK overall and by content type, sender group and age group of recipients. Volumes for such traffic in 2016 are estimated to have been about 40% of the level they would have reached if there had been no e-substitution and the extent to which it has taken place has been highly uneven across different segments of business mail. ANOVA estimates suggest that of the factors examined to account for differences in e-substitution the age of recipients was by far the most important and in a distant second place was the interaction of content-sender factors.

Catherine Cazals, Thierry Magnac, Frank Rodriguez, Soterios Soteri

The Danish Problem: Soon Everybody’s? A Comparative Analysis of Digitalization Effects on Letter Volumes

Abstract

Letter volumes in Denmark dropped with 75 percent between 2000 and 2016, whereas Sweden’s declined with 34 percent. We make a comparative analysis of Denmark and Sweden by analyzing the effects of digitalization and the strategies from the common USO-provider Postnord. Denmark had a national digitalization strategy already from 2001 and a law in 2012 required everybody to have a digital mailbox. In response to falling demand, prices were increased sharply and service reduced. Sweden has a fragmented market for digital messages and with large postal volumes, competitive prices, a well-functioning market for second class mail and better ability to adjust costs, digital substitution was limited.

Peter Andersson, Sofia Bengtsson, Johanna Eriksson

Parcel Lockers, an Answer to the Pressure on the Last Mile Delivery?

Abstract

Over the last decade, e-commerce has spurred the growth in parcel lockers. This relatively new phenomenon has the potential to significantly impact different aspects of the traditional postal delivery model. First of all, preliminary research shows that consumers approach parcel lockers positively, although it is yet only used by a rather small part of end users. Secondly, parcel locker delivery is estimated to be more cost efficient than traditional home delivery. Thirdly, parcel lockers are expected to have a positive impact on ecological sustainability. This paper gives an overview of the parcel locker landscape of several countries with differing postal market characteristics. The paper continues with an analysis of the sustainability and cost efficiency of parcel lockers. Finally, some potential regulatory challenges are outlined.

Özhan Zurel, Laurent Van Hoyweghen, Stijn Braes, Aurelie Seghers

The Transformation of Postal Services in Light of Technological Developments and Users’ Needs

Abstract

This paper suggests that technology is empowering the management of logistic networks by virtual platforms. This is changing postal services in two concurrent ways: through the segmentation of the production chain into amorph segments (APLs, proximity points, last-mile express services) and the vertical integration strategy followed by e-commerce platforms. It allows also the management of postal services through a crowdsourced network. Technology modifies how activities are performed but processes are de facto equivalent. Platform operations should be then regarded as part of the overall postal service and not a mere intermediation between different players. The forthcoming revision of the Postal Service Directive should then consider the disruption of traditional business models and production chains.

Luigi Scorca

Postal Industry Diversification: Exploring New Worlds and Facing New Regulations

Abstract

This chapter shows how innovation, in particular, operational diversification towards e-commerce and digital services, broadens the regulatory framework that postal operators must take into account.

First, we will analyze how the Belgian and French universal postal service providers succeed in using their infrastructure and their image of trust to diversify their activities to counter-balance revenue loss resulting from the decline in letter volumes.

We will then detail the different new regulatory issues that will be faced by postal operators when offering these new e-commerce and digital services, including digital identity tools or electronic safes.

Virginie Alloo