Progress in the Competitive Agenda in the Postal and Delivery Sector
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Progress in the Competitive Agenda in the Postal and Delivery Sector

Edited by Michael A. Crew and Paul R. Kleindorfer

Regulation continues to be an important issue in the postal and delivery sector of the global economy. This latest volume of the series covers progress made in the competitive agenda in the industry. It is global in scope and addresses topics of great importance to scholars and practitioners of postal regulation and public sector economics.
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Chapter 7: Costing Elements of the Universal Service

Richard Bradley, Phil Burns and George Houpis


Richard Bradley, Phil Burns and George Houpis* INTRODUCTION 1 Most incumbent postal operators are required to provide a universal service with minimum service levels across several dimensions, such as geographic coverage, quality of service and the number of days a week on which a service operates.1 This is known as the Universal Service Obligation (USO). In some cases, a designated universal service provider (USP) would have a commercial incentive to meet or exceed the minimum service standards even without a formal obligation. In other cases, given a free commercial choice, the USP would provide lower standards of service to some or all customers. The literature has devoted considerable attention to understanding the net cost to operators of the USO. NERA (1998) proposed the net avoided cost (NAC) approach, Rodriguez et al. (1999), the entry pricing approach, and Cremer et al. (2000) the profitability cost approach.2 The last aims to measure what a USP would do differently without the USO, given a free commercial choice, and how profits would change as a result.3 This chapter extends the discussion to consider how much individual elements of the USO add to net costs (Boldron et al., 2006; Jaag et al., this volume, ch. 8). We develop an application of the profitability cost approach which extends naturally to consider how a USP’s profits would change in response to a reconfigured USO, rather than in response to a complete removal of all USO requirements. Our work also develops several...

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