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

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.