Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 1: Gross substitutes versus marginal substitutes: implications for market definition in the postal sector
Internet competition has had a major impact on the demand for postal services, particularly letter delivery. In the US, total mail volume delivered by the US Postal Service has declined from a peak of 213 billion pieces in 2006 to around 160 billion in 2012, as mailers have shifted correspondence to the Internet (USPS, 2013, p. 5; GAO, 2013, pp. 2ñ3). At the same time, mobile phone use has grown dramatically, with approximately 323 million mobile phone subscribers in the US in 2012, with data traffic over those phones increasing by a factor of six from 2009 to 2012 (CTIA, 2012). Significant declines in mail volume have been seen in other major countries throughout the world, as smart phones and the Internet take an increasing share of what was previously provided by transaction and advertising (Accenture, 2013, p. 8). This raises the question of whether postal operators (POs) retain sufficient market power to justify continued public oversight of their pricing. Market definition techniques, pioneered in the 1980s by US competition authorities for use in merger evaluation, have become used around the world to assess market power. Such techniques can be useful in ex ante assessments of deregulation, analogizing removal or a regulator to removal of a rival in a merger. However, following Brennan (2008), because POs have lost business to electronic delivery does not necessarily imply that they lack market power.
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