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Universal service obligations in the postal sector: The relationship between quality and coverage

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  • Calzada, Joan

Abstract

This paper examines competition in the postal sector when one private incumbent and one entrant play a three-stage game. First, firms choose their coverage. Then, they choose the quality of the mail. Finally, firms choose the price. I modify the traditional model of product differentiation proposed by Mussa and Rosen [Mussa, M., Rosen, S., 1978. Monopoly and product quality. Journal of Economic Theory 18, 301-317] in order to consider that firms decide their quality and coverage. Valletti et al. [Valletti, T., Hoernig, S., Barros, P., 2002. Universal service and entry: the role of uniform pricing and coverage constraints. Journal of Regulatory Economics 21 (2), 169-190] show that when an incumbent is regulated by a uniform pricing constraint the entrant will choose a low level of coverage to increase the incumbent's uniform price and weaken competition. In this paper, I show that by increasing product differentiation, the entrant can obtain the same price increase with a smaller reduction of coverage. Acknowledgement of the strategic link between quality and coverage can be very useful in the design of a regulatory policy. The paper also considers a mixed duopoly in which the public firm covers the entire market and offers high quality service. In this context, I explain that the mixed equilibrium implements the first-best qualities and coverage levels.

Suggested Citation

  • Calzada, Joan, 2009. "Universal service obligations in the postal sector: The relationship between quality and coverage," Information Economics and Policy, Elsevier, vol. 21(1), pages 10-20, February.
  • Handle: RePEc:eee:iepoli:v:21:y:2009:i:1:p:10-20
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    References listed on IDEAS

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    1. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
    2. Gasmi, F. & Laffont, J. J. & Sharkey, W. W., 2000. "Competition, universal service and telecommunications policy in developing countries," Information Economics and Policy, Elsevier, vol. 12(3), pages 221-248, September.
    3. Cremer, Helmuth & Grimaud, André & Florens, Jean-Pierre & Marcy, Sarah & Roy, Bernard & Toledano, Joëlle, 2001. "Entry and Competition in the Postal Market: Foundations for the Construction of Entry Scenarios," Journal of Regulatory Economics, Springer, vol. 19(2), pages 107-121, March.
    4. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May.
    5. Cremer, Helmuth & Thisse, Jacques-Francois, 1994. "Commodity Taxation in a Differentiated Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 613-633, August.
    6. Joan Calzada, 2009. "Access charges under two-tier pricing," Journal of Regulatory Economics, Springer, vol. 35(3), pages 296-311, June.
    7. Valletti, Tommaso M & Hoernig, Steffen & Barros, Pedro P, 2002. "Universal Service and Entry: The Role of Uniform Pricing and Coverage Constraints," Journal of Regulatory Economics, Springer, vol. 21(2), pages 169-190, March.
    8. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    9. H. Cremer & F. Gasmi & A. Grimaud & J. J. Laffont, 2001. "Universal Service: An economic perspective," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 72(1), pages 5-43, March.
    10. Rosston, Gregory L. & Wimmer, Bradley S., 2000. "The 'state' of universal service," Information Economics and Policy, Elsevier, vol. 12(3), pages 261-283, September.
    11. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    12. Helmuth Cremer & Philippe De Donder & François Boldron & Bernard Roy, 2008. "Social Costs and Benefits of the Universal Service Obligation in the Postal Market," Chapters,in: Competition and Regulation in the Postal and Delivery Sector, chapter 2 Edward Elgar Publishing.
    13. Cremer, Helmuth & Marchand, Maurice & Thisse, Jacques-Francois, 1991. "Mixed oligopoly with differentiated products," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 43-53, March.
    14. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
    15. Rodriguez, Frank & Storer, David, 2000. "Alternative approaches to estimating the cost of the USO in posts," Information Economics and Policy, Elsevier, vol. 12(3), pages 285-299, September.
    16. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    17. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    18. Germà Bel & Joan Calzada, 2009. "Privatization and Universal Service Obligations," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 650-669, December.
    19. Crew, Michael A & Kleindorfer, Paul R, 1998. "Efficient Entry, Monopoly, and the Universal Service Obligation in Postal Service," Journal of Regulatory Economics, Springer, vol. 14(2), pages 103-125, September.
    20. Rosston, G.R. & Wimmer, B.S., 2000. "The "State" of Universal Service," Papers 99-018, United Nations World Employment Programme-.
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    Citations

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    Cited by:

    1. Poudou, Jean-Christophe & Roland, Michel, 2014. "Efficiency of uniform pricing in universal service obligations," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 141-152.
    2. Lindhjem Henrik & Pedersen Simen, 2012. "Should Publicly Funded Postal Services be Reduced? A Cost-Benefit Analysis of the Universal Service Obligation in Norway," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-33, June.
    3. Damien Broussolle, 2007. "Full Market Opening In The Postal Services Facing The Social And Territorial Cohesion Goal In France," Working Papers of LaRGE Research Center 2007-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    4. Cristinel CONSTANTIN, 2012. "Coordinates Of Postal Services Market In Romania," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 261-272, November.
    5. Bakhtieva, Dilyara & Kiljański, Kamil, 2012. "Universal Service Obligation and Loyalty Effects: An Agent-Based Modelling Approach," MPRA Paper 48549, University Library of Munich, Germany.
    6. Cristinel CONSTANTIN, 2015. "An Assessment of Customer Behaviours Regarding the Romanian Postal Services," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 2, pages 70-76.
    7. Gautier Axel & Poudou Jean-Christophe, 2014. "Reforming the Postal Universal Service," Review of Network Economics, De Gruyter, vol. 13(4), pages 453-477, December.
    8. repec:eee:indorg:v:52:y:2017:i:c:p:63-95 is not listed on IDEAS
    9. Helmut M. Dietl & Urs Trinkner, 2008. "Developing Universal Postal Services in Latin America – an Economic Perspective," Working Papers 0012, Swiss Economics, revised Nov 2008.
    10. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 291-312, June.

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