Edited by Michael A. Crew and Paul R. Kleindorfer
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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