Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 7: Segmentation and nonlinear pricing in the postal sector
Network operators typically use quite sophisticated pricing policies. For instance, nonlinear pricing (second-degree price discrimination) has a long tradition in the telecommunication and energy sectors. Similarly, in these and other sectors, prices are often differentiated according to market segments (third-degree discrimination). Even though it is not the most prominent textbook example to illustrate such pricing policies, the postal sector is in fact no exception. Ramsey pricing is effectively a form of third-degree price discrimination, based on price elasticities. In addition, most postal operators have volume discount programs (a form of nonlinear pricing). While regulators and competition authorities are often reluctant to accept these practices, economists tend to view differentiated pricing policies in a more positive way. For a regulated operator, they are an effective way to cover fixed cost while mitigating distortions that would be associated with linear pricing. When the regulatory policy is well designed and the operator is welfare maximizing, sophisticated pricing policies can only be welfare enhancing. However, when the operator is profit maximizing, this is no longer necessarily true: the scenario where a profit-maximizing operator may engage in pricing policies that are detrimental to welfare can then no longer be ruled out. Nevertheless, the literature has shown that departures from linear pricing are often welfare enhancing (and may be Pareto improving), even when the operator is profit maximizing.
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