Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 14: Price-cap Regulation in the Postal Sector: Single versus Multiple Baskets
* Claire Borsenberger†, Sébastien Bréville‡, Helmuth Cremer§, Philippe De Donder¶ and Denis Joram†† 33 34 35 36 37** 1 INTRODUCTION Starting in the mid-1980s, many incumbents have become subject to price caps. Roughly speaking, a price cap defines an average price level not to be exceeded by the operator. The operator is otherwise free to adjust the relative prices of its different products. Pricecap regulation is an extreme form of incentive regulation which provides powerful incentives for cost reduction. The system is also intended to reduce political interference in the setting of individual prices and the resulting price flexibility may also enable incumbent operators to become more business oriented. While their average price is capped by the regulator, they could adjust the prices of their different products to reflect costs, elasticity of demand, complementarities between segments, and competitive pressure. In the postal sector, price-cap schemes are by now widely used. However, in reality their design differs, often significantly, from the idealized policy just described. In particular, regulators very often are tempted to add additional constraints limiting price variations of so-called ‘sub-baskets’. This is justified by the need to offer special protection to some groups of customers who for a variety of reasons may receive an extra weight in the regulator’s objective. For instance, the regulator may want to restrict the increase in single-piece rates. In addition, it is sometimes argued that sub-baskets may restrict the incumbent’s ability to engage in anticompetitive behavior (for example, ‘squeezing’ competitors’ markups). In this...
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