Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 2: Estimating the Impact of Price Regulation on Service Quality in Post
Gregory Swinand, Sean Lyons, Michael O’Grady and David Murphy 1 INTRODUCTION Quality of service is a key regulatory element for many industries, including post. Indeed, some of the more curious stories in the history of regulatory economics involved quality regulation. In one such example, the quality of air travel, down to the amount of meat on a sandwich, was once regulated in the US.1 The rationale for the regulation of sandwiches has been posited as an example of the interaction between regulatory capture, and desire to avoid non-price competition. The importance of possible non-price competition between (even fully regulated) rivals is in fact, one of the principal concerns of a policy maker considering regulation of quality. While quality’s importance is not doubted, quality seems to have been less studied than other elements of regulation, such as price and incentives, although recently quality has been receiving more attention (Crew and Kleindorfer, 2008). In addition to a useful recent survey by Sappington (2005), research into quality in other network industry has recently appeared. For example, Joskow (2006) investigates quality in the context of pricing and incentives in electricity distribution. In spite of this recent work, there are still many unanswered questions in the realm of optimal quality of service regulation, especially in relation to likely tradeoﬀs between quality, cost and price. For example, Joskow (2006) posits: ‘Any incentive regulation mechanism that provides incentives only for cost reduction also potentially creates incentives to reduce service quality when service quality and costs are...
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