Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 10: Estimating long-run incremental costs in the postal sector: a UK perspective
In the UK, the presence of both digital and postal competition has led to proposals to reduce the levels of ex ante regulation, and move towards ex post regulation following the transfer of regulatory duties to Ofcom in 2011. This was accompanied by a greater emphasis on the provision of information by the universal service provider (Ofcom, 2012a). This provision of information includes the estimation of the long-run marginal or incremental costs to assess whether prices are recovering those costs and contributing to fixed costs and profit. The European Commission guidelines for assessing anti-competitive behavior of a dominant firm in any sector refer to long-run average incremental cost (LRAIC) estimates as one of the relevant cost benchmarks (European Commission, 2009). In general, prices that recover those costs are considered to be reasonable and prices below long-run incremental costs may be reasonable only in more limited circumstances. These cost benchmarks have been applied in several sectors and were used outside of the UK in some EU decisions for the postal sector.
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