Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 13: Electronic substitution and USO scope definition
Postal markets worldwide are experiencing a long-term trend of decreasing mail volumes as a consequence of e-substitution. Such a trend is likely to be exacerbated over the coming years by a prolonged situation of economic crises. Mail volume reduction, in turn, causes a continuous uptrend in the unit costs of mail, since fixed costs of production are spread over fewer volumes. The increase in unit costs is greater for universal service providers (USPs), since such an obligation makes their cost structure more rigid. USPs cannot balance the increase in unit cost with price increases: such an increase, in fact, would accelerate e-substitution and might result also in the loss of volumes to competitors. Increasing prices may not be the answer as the reduced volume resulting would lead to a further increase in unit costs, potentially triggering a graveyard spiral. Under the condition that the firm providing the service is free to adapt its service level and its base cost to worsening conditions, it is still possible to work out ways to render the firm financially viable. However, the requirement to provide a universal service (national geographical delivery coverage, six days a week service, J11 service) imposes a number of rigidities on the cost structure of the USP that seriously threaten its financial viability. A USP may well find itself with a shrinking gap between its unit cost and unit revenue that cannot be dealt with, unless universal service requirements are changed.
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