Revisiting postal sector pricing

Background

The postal sector is of particular economic significance with mail and parcel delivery contributing 0.5% of EU-GDP. The market is highly concentrated, with incumbents being amongst the largest employer in each EU economy. National incumbents are designated with Universal Service Obligations (USO) that mandate requirements on efficiency, service and price to ensure a universal and affordable service for consumers. However, the sector faces systemic challenges to survive in the digital era.

Postal operators deliver both advertising and non-advertising mail, with letter volumes consistently declining, especially for non-advertising mail due to electronic substitution. In turn, this reduces the attention consumers pay to mail advertising, which reduces demand for advertising mail. As a consequence, postal operators are struggling to remain financially viable, particularly whilst meeting their USO. Current proposals to sustain USO viability include softening USO requirements and deprioritising competition.

Research

In the underlying research, we consider how the attention consumers pay to their mail is influenced by the mailmix: the composition and total quantity of mail they receive. We subsequently provide a comprehensive analysis of the optimal pricing strategies for a postal operator to stimulate and extract the value from the postal sector, providing an alternative pricing strategy to the existing inferior approach of cost-plus pricing. We address how postal operators should price different kinds of mail and show that our pricing structure enables postal operators to increase profitability and meet their USO’s without weakening them. We also study the effects of increased competitive entry into different areas of the postal sector. 

Impact 

Firstly, our results provide an analytical guideline for postal operators to revise their pricing strategies and to thereby improve their profitability as well as the viability of the USO. Secondly, our pricing approach has the potential to improve the value of the postal sector for all market participants: postal operators benefit from higher profit, advertisers benefit from higher attention to their advertisements, non-advertisers benefit from lower prices and recipients (consumers) benefit from a more preferable mailmix. Thirdly, from a policy perspective, our pricing approach enables the government to reduce subsidies paid to postal operators to sustain USO. Fourthly, for competition authorities, we show how additional competition can be harmful in the postal sector.

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