We used a model never used in postal services before to frame how markets and customers would behave. The regulator used this evidence to support its policy decision as it tries to lower retail prices for consumers.
A postal regulator in Europe was considering changing its wholesale regulation policy to increase competition. It was going to ask the incumbent to provide rivals with access to its network.
It needed to work out what the benefits to the consumer and society would be if they followed this path.
Pass the parcel
We developed a coherent framework for assessing how rivals and incumbent would respond to the policy change and how this would ultimately translate into lower retail prices for the mailers.
We used a model – a Bertrand differentiated framework – usually used in mergers of differentiated products, and never before used in postal regulation, to estimate by how much retail prices would go down following a reduction in wholesale prices. Then we estimated the change in consumer surplus and producer surplus.
The beauty of our analysis is that it was done in a coherent and transparent framework that gives powerful insights on market dynamics and customers’ preferences and behaviour. It was a fitting framework given the fact that postal operators provide different but substitutable products.
First past the post
It became an important element in the evidence the regulator gave to support its policy, and made conversations with the other stakeholders informed and constructive.
Our analysis showed that overall the policy could be expected to be positive, benefitting customers through lower prices, allowing an increase in demand for postal services.