How to regulate the postal industry: an economic approach

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Regulators and lawmakers are failing to understand the economics of the postal industry, claims the International Post Corporation (IPC) in a joint study undertaken in conjunction with the German Institute for Economic Research (DIW).

The study notes that current liberalisation of postal markets, both in Europe and the US, is being accompanied by new, complex and detailed regulations, but says that the economics of the postal business and the dynamics of the postal market are either ignored or not understood.

“Regulators have taken their liberalisation model from industries such as gas, electricity and telecommunications, but have failed to grasp that these classical network industries are defined by a natural monopoly consisting of pipelines, cables, or similar infrastructure. The postal industry, by contrast, is characterised by an infrastructure consisting mainly of a human delivery workforce, routes, and other means of transportation that are open to everyone,” said IPC chief executive officer Herbert-Michael Zapf, presenting the report. 

The possibility of duplicating postal infrastructures, the absence of large sunk costs and the divisibility of necessary investments mean that barriers to entry do not exist in the postal sector and that the industry is not a natural monopoly, claims the study. Thus regulatory interventions aimed at fostering market entrants are not necessary and are likely to lead to inefficient market structures, it adds. 

“Regulation tends to be short-sighted and based on wrong assumptions. What makes matters worse is that the postal industry is not a self-growing industry so applying the wrong framework has a tremendous impact on the sector and the economy as a whole,” said Zapf. 

According to the study, the changes in market conditions over the past years also mean that the scope and financing of the universal service obligation (USO) need to be examined in order to prevent market distortions. It claims that current USOs are still built upon tradition, rather than on the actual needs of the markets. While the USO was built on policy goals such as equality of living conditions at a time when the letter was the prime means of communication, nowadays, telecommunications and internet industries offer “formidable substitutes” and policymakers have failed to take account of these developments, it explains, adding that the main problems are uniform price and quality levels: “Uniform prices and quality levels are not in line with basic economic reasoning.” 

The authors therefore conclude that the best policy advice is to tear down sector-specific regulation and allow existing competition law rules to deal with any deficiencies that may arise in the postal market. 

“Any artificially imposed constraints on postal service operations caused by ex ante regulation harm economic efficiency. The very fact that large irreversible investments do not play an important role in postal markets, implies that there are virtually no benefits from using an ex ante approach as anticompetitive practices can be cured effectively on an ex post basis by the application of the relevant competition law.” 

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