Competing With Mr. Postman: Business Strategies, Industry Structure, And Competitive Prices In Liberalized Letter Markets

Letter markets are still highly regulated in most countries. Some countries, such as those of the European Union, plan to liberalize letter markets within this decade. Competition will provide many new challenges and opportunities for established and new players. In this paper we analyze business strategies and the resulting industry structure in liberalized letter markets. We describe the economic characteristics of the industry and identify business models for new competitors. To predict the industry structure, we construct a game-theoretic model, which takes into account the relevant segments and geographic differences of the letter market. The model allows us to compute equilibrium prices, market shares, and profits for the incumbent and entrants. We can thus assess the different strategies. Although we calibrate our model with German data, our results are general and can be applied to other countries with similar characteristics, such as France, the U.K., and to some extent even the U.S.