Regulating Access to Stimulate Competition in Postal Markets?

06.12.2010

In European Commission (2005), the Commission’s most recent progress report to the Council on the application of the Postal Directive1, it is stated: “Competition has yet to develop in the addressed mail segment outside niche services, and this suggests that limited initial market opening combined with sometimes limited regulatory capacity or certainty, advantages enjoyed by incumbents, and regulatory asymmetries have all combined to deter entry …The reasons for the continuously slow progress towards greater competition in fully liberalized postal markets are puzzling and deserve further analysis”.

In this paper, we provide some elements for such an analysis. Clearly, with the market moving to a one-way distribution market and the abolition of legal barriers to entry (the reserved sector) in postal markets, the possibilities for competition increase, and we investigate whether effective competition is likely to develop on its own, or whether specific access regulation is necessary or desirable in attaining this end.2 We argue that in a liberalized postal market, besides legal and regulatory entry barriers, there are no significant natural entry barriers that could ultimately prevent profitable entry. We thus conclude that, as a result of the absence of monopolistic bottlenecks, a large section of the postal market will be accessible after full liberalization. Focusing on downstream access (competitors inserting mail at a point further down in the network of the Universal Service Provider (USP)), we argue that specific mandatory access regulation, on top of generic non-discrimination principles found in competition law and strengthened if necessary in sector-specific regulation, is not needed to facilitate competition and may be counterproductive. Not mandating access does not imply that access will be unavailable: the incumbent may offer it on commercial terms. Furthermore, regulating access may bias entry strategies towards a specific entry mode, thereby possibly limiting innovation.

The Postal Directive does not impose specific access rules. It refers to transparent and non-discriminatory access to the postal network, to tariffs and special tariffs having to be “geared to cost”, and to the USP having to take into account avoided cost when setting special tariffs. Access is otherwise left to negotiations between market players. The European Commission (2005) states that access is an important issue that merits further analysis, that it appears premature to draw any conclusions at this stage, and that:

“Access can help facilitate market entry for upstream consolidators. New competitors who want to establish a delivery network can also use access for a transitional period to build up customer relationships and volumes, before being able to compete end to end with the incumbent”.

This no doubt is true, but it seems only one side of the picture. If mandating access at regulated tariffs makes access cheap, as compared to rolling out alternative infrastructures, then a natural development of full end-to-end competition may be hindered, or may be prevented altogether. As infrastructure competition typically offers more scope for innovation by entrants and provides stronger incentives for cost reduction, upsetting the balance by making available a mandated downstream access alternative may thus be counterproductive. In this paper we argue that, taking into account EC competition law and using the principles underlying the most recent regulatory thinking (in particular the EC Electronic Communications Framework), downstream access should not be mandated via regulation. In our view, the absence of insurmountable natural entry barriers implies that a hands-off approach, a regulatory commitment to negotiated access, leaving the development of competition – and also of the type of competition – to the market, is most desirable.

Our conclusion, hence, differs somewhat from that reached in NERA (2004) and Moriarty and Smith (2005), in which it is suggested that regulated access to delivery networks may be necessary to have substantial scope for competition. We agree about the potential for competition, but in our view, given that delivery is not a monopolistic bottleneck, the incumbent will typically want to benefit from scale economies and, hence, find it to be in its interest to provide access, especially when a non-discrimination requirement is in place. Consequently, we argue for relying on ‘freedom of contract’, instead of obliging the USP to provide access at regulated terms. If it were nevertheless found that regulatory intervention could bring added value, we believe that the requirements of transparency and nondiscrimination should be sufficient to establish a competitive postal market. We note that our conclusion is in line with that of Van der Lijn and Meijer (2004). Our paper complements theirs, among others by providing a more elaborate legal perspective. We discuss the added value of our contribution more extensively in the concluding section, where we will also discuss related literature such as Crew and Kleindorfer (2002) and Panzar (2002).

The remainder of this paper elaborates our arguments. In Section 2, we set out the legal framework in Europe, leading to the conclusion that the presence of barriers to entry is a necessary condition for any intervention, whether under competition law or sector-specific regulation. In Section 3, we ask whether, in the postal market, there are natural barriers to entry, and we provide some indicative calculations to show that, already with a low market share, entry may be profitable. In Section 4, we explain the difference between natural monopolies, and monopolistic bottlenecks and argue that, even though segments of the postal market may be a natural monopoly, there is no economic justification for regulatory intervention on access as there are no monopolistic bottlenecks. In Section 5, we feed the results of the economic analysis into the legal framework and come to the conclusion that a hands-off approach is most desirable.

Authors: 
Prof. Pierre Larouche, Dr. Paul W.J. de Bijl, Dr. Eric van Damme
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