Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 1: Non-linear Pricing, Volume Discounts and the USO under Entry
* Michael A. Crew† and Paul R. Kleindorfer‡ 01 02 1 INTRODUCTION The inherent tensions between maintaining a Universal Service Obligation (USO) combined with full market opening (FMO) were recognized as postal markets began to become open to increased competition. These tensions are exacerbated by serious intermodal competition in the form of electronic substitution for both advertising and transactions mail. Indeed, the impact of electronic competition may be even more serious than the impact of direct competition from FMO, as illustrated by significant declines in mail volume for many major postal operators (POs) since 2008. Crew and Kleindorfer (2011a) demonstrated that retaining volumes for ultimate delivery by the universal service provider (USP) is fundamental to maintaining economies of scale and therefore the USO, and remaining financially viable. The purpose of this chapter is to review the role of price discrimination, especially quantity discounts, in maintaining volumes in the face of direct and electronic competition. Price discrimination has been common in the postal sector for many years. Ramsey pricing is effectively a form of third-degree price discrimination, in which different prices are charged in different market segments, based on inverse elasticities, with low elasticity products having a higher markup. Quantity discounts, a form of second-degree price discrimination, have de facto been a feature of postal pricing in the form of worksharing discounts which have minimum volume requirements and may entail additional volume discounts. The purpose of this chapter is to provide a more formal analysis of price discrimination, especially the role of...
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