Market Opening, Downstream Access, and Competition in the Market for Mail

Transcription

1 swiss economics arket Oening, ownstream ccess, and ometition in the arket for ail hristian Jaag Urs Trinkner Swiss conomics Working Paer 00 ugust 2008 Swiss conomics S G beggweg 5 H-8057 Zürich T: +4 (0) F: +4 (0) office@swiss-economics.ch

2 arket Oening, ownstream ccess, and ometition in the arket for ail hristian Jaag Urs Trinkner. ntroduction Postal market liberalization is a current issue in Switzerland as well as in the uroean Union (U). n the U, the market for addressed mail items has been liberalized down to a reserved (monooly) area for letters weighing less than 50g at the beginning of ndividual countries have already gone further, e.g. Sweden with full market oening in 993. U-wide full liberalization is envisaged in 203. n Switzerland, the reserved area has been reduced to 00g in sring 2006 and a ostal legislation revision is currently under way, otentially comrising further stes towards full liberalization. The reserved area has been the traditional means to finance the rovision of universal ostal services at uniform rices. There is, therefore, a concern that reductions in the reserved area could undermine the ability of the incumbent ostal oerator to finance its universal service obligation (USO). We exlore this issue for Switzerland in this aer. Based on Jaag (2007a) we roose a simle calibrated model of the Swiss letter market offering theoretical insights into the mechanics of market oening and access regulation along with uantitative conclusions bearing direct olicy relevance. The model allows for a continuum of market oening scenarios. oreover, we are able to uantitatively comare euilibria with and without mandated or negotiated downstream access rovided to entrants at regulated rates. The imact of liberalization on the incumbent oerator has been tackled before: ietl et al. (2005) develo a model of the Swiss letter market with a focus on regulatory scenarios. Hill, Robinson, and Rodriguez (200) examine the rosects for a graveyard siral in the UK and focus on scenarios in which the USO remains unchanged. Key in their analysis are the extent and imlications of entry. Based on a calibrated model, rew and Kleindorfer (200) find that entry is likely to reduce efficiency and financing roblems for the incumbent oerator are likely to become significant. n their rosective study on behalf of the uroean ommission, PriceWaterhouseooers (2006) find that under full market oening (FO) the USO needs to be changed significantly ( adated to market conditions ) in order to be financially sustainable. The reort reared by Oxera (2007) discusses various mechanisms that could be used to fund USO rovision. The existence of a receiver externality, the benefits enjoyed by the receiver of a ostal item, imlies that reciients also should or could contribute to the financing of delivery costs. This gives rise to the receiver-ays-rincile. Felisberto et al. (2006) and Friedli et al. (2006) argue that the introduction of a delivery flat rate (FR) allows to segment the receiver base into those who accet low service levels with delivery only to the nearest ost office and those who are willing to ay for tailormade delivery, tyically to the doorste. omared to the high-level universal service obligation currently in lace, this reduces the roortion of overserved receivers and hence gives rise to a more efficient ostal delivery system. n the following, we will confine our analysis to ure sender-ays scenarios. Jaag (2007b) and Jaag and Trinkner (2008) oint to the oortunities and limits of charging receivers for ostal services. They conclude that the actual collection of reciient fees (versus reducing the cost of delivery by changing

3 From the ersective of network economics, mail conveyance can be segmented into the comlementary comonents collection, sorting, and delivery. 2 mong others, Knies (2006) argues that in none of these comonents are there irreversible costs which would constitute a monoolistic bottleneck (essential facility) in those comonents that exhibit the roerty of a natural monooly (i.e. a subadditive cost function). Hence, from a network economic oint of view, there is no obstacle to effective cometition and hence no need for access regulation in fully liberalized mail markets. However, some incumbent oerators across uroe are granted considerable VT (value added tax) advantages. This might result in asymmetric market euilibria which do not comly with the concet of otential cometition. On the other side, binding USO obligations might distort the euilibrium in favor of new market entrants without such obligations. Note that market entry has been observed in liberalized mail markets desite the resence of significant economies of scale and scoe (see Farsi, Filiini, and Trinkner (2006) for the case of Switzerland). Hence, mail markets seem not only to be contestable, but also readily contested (see Table ). onseuently, aart from the United Kingdom, no country has introduced mandated access while allowing byass, i.e. full market oening combined with regulated access. n contrast to the uroean countries, delivery of addressed mail in the US remains a monooly. However, the US does have an active access market, with regulated discounts based on avoided costs for ustream services (referred to as worksharing). Table : Need for Regulation or Protection of the USO? Natural onooly No Natural onooly Sunk ost onoolistic Bottleneck ccess Regulation ometition No Regulation No USO ontestable arket No Regulation ometition No Regulation No Sunk ost USO ontested arket USO Protection/Financing? ometition USO Protection/Financing? The welfare effects of downstream access and byass in a liberalized ostal environment have received much attention in the ast. n their seminal contributions, Baumol (983) and Baumol and Sidak (994) develoed the so-called efficient comonent ricing rule (PR). 3 n their setting, the rents of the sector as a whole are redetermined (by an exogenously fixed end-to-end roduct rice). The distribution of these rents within the sector is efficiently arranged by negotiations between the market arties. This results in the (downstream-) infrastructure rovider charging its oortunity costs foregone due to new entry. Gautier (2006) and de onder (2006) model ostal markets with the entrant being a cometitive fringe, setting its stam rice at marginal cost. They allow for the entrant s endogenous choice of delivery technology, much the same as in our model. omared to the revious literature, e.g. rmstrong, oyle, and Vickers (996), and rmstrong (2006), we exlicitly model the extent of entry as a function of the access regime in lace and the resulting asymmetric rice cometition. We extend the analysis of market oening on cometition in Jaag (2007a) by considering various access regimes. While also being able to determine the welfare imlications of delivery freuency) is not likely to be a solution to the USO financing roblem, leading us to confine our analysis to the ure sender-ays scenario. 2 Technical functions, such as the ostal code system, are indeendent of the network characteristics of the ostal sector; standardization and access to these can be dealt with searately. 3 See Laffont and Tirole (994) for a derivation of otimal access charges in a framework of asymmetric information.

4 access vs. byass, we focus on the effect of access rice setting on the incumbent s and the entrant s rofit and market enetration. The aer roceeds as follows: Section 2 gives an outline of the model. Section 3 introduces technology and consumer references. Section 4 discusses rice cometition and establishes the cometitive euilibrium, while in section 5 we discuss the entrant s market coverage decision. Section 6 discusses welfare effects of access. n section 7 we uantitatively assess various scenarios with resect to market oening and access regimes. Section 8 concludes. 2. odel Outline The model addresses the entry game in the ostal market. There is a legislator setting the incumbent s USO and the degree of market oenness. The incumbent (denoted ) faces rescribed behavior in its roduct choice and ricing behavior. ntrants (denoted ) choose the scoe of their entry and their conduct in rice cometition. For simlicity, we ool all entrants in a single reresentative one who is due to imlicit or exlicit collusion able to charge a marku over marginal cost. 4 Note that in our model we do not treat the discrete entry decision of oerators. t will be interesting, however, to comare the oerators rofits under various scenarios in order to assess s relative incentive to enter into the market in the first lace. r 0 m Figure : arket dimensions: geograhical/consumer tye (r) and letter tye (m) dimension. Figure dislays two relevant dimensions of the ostal market: The horizontal dimension is the letter tye dimension, while the vertical dimension has the two interretations of the geograhical location of delivery or sender tye. While the first dimension is useful to define market oening, the second determines the structure of the cost function and area coverage of delivery if it is endogenously determined. 5 The figure shows market segmentation after (artial) market oening and with no byass allowed. The USO currently in lace imlies full market coverage in both dimensions by the incumbent. The entrant s market coverage is ictured by the dark shaded area in the figure. The light shaded area deicts the art of the market in which the entrant hands over mail to the incumbent for delivery through downstream access. This is the market segment under cometition (in the case of Figure, this cometition is only for rovision of ustream services). Such cometition is limited by the degree of market oening m and s own choice of coverage r. The rest is monoolistic, i.e. the entrant is either not able or not willing to serve that market. 4 This is counter to the cometitive fringe assumtion usually made in the literature. However, e.g. in the Swiss market for the conveyance of unaddressed mail, such behavior is common in ractice. oreover, allowing the entrant to make a rofit in the model ermits an assessment of market attractiveness to otential entrants when the market is being oened. 5 Our aroach is similar to the one emloyed by Valletti, Hoernig, and Barros (2002).

5 There are three otential aths (-) a mail item can take on its way from the sender to the receiver (see figure 2). n the monoolistic art of the market, only ath () is ossible. n the cometitive market segment with byass only (without access), also () becomes feasible. With access, all three aths are ossible. With worksharing (see section 5.3) only aths () and () are feasible. ncumbent ntrant ollection /Processing elivery Figure 2: Possible aths of mail The USO is exogenously defined, which currently amounts to full market coverage for the incumbent Swiss Post. The seuence of endogenous decisions by the actors and in the model is then as follows: nticiating the euilibrium in the resulting rice cometition, first, entrants decide on their market coverage with either own delivery or if available downstream access to the incumbent s delivery network or a combination of both. Second, there is rice cometition in the cometitive market segments with consumers deciding on the uantity of letters to send with each rovider. arket entry r ; 2 ometitive rice setting. Figure 3: Timeline of the entrant s decisions in ostal cometition. n the formal descrition of the model below, caital subscrit indicates the association of a variable with the entrant. Without access, it is comlemented by subscrit, with access by subscrit. Subscrit is the incumbent acting as a monoolist, while subscrit denotes the incumbent in cometition. To increase readability, we suress subscrits where no distinction is necessary. n order to find a subgame-erfect euilibrium, we solve the model backwards, starting with an analysis of ostal roduction and consumer demand. 3. Technology and onsumer Preferences Technology and the USO determine the cost of mail conveyance. t is the sum of (a) uantity-deendent (variable) cost, (b) indeendent (fixed) cost. n the model, the incumbent s cost consists of a fixed amount services and from downstream access services downstream volumes, resectively. delivery cost. Total incumbent cost is thus given by c f f and variable cost from end-to-end, where and are end-to-end and is the incumbent s s marginal end-to-end cost and marginal. () The entrant has costs

6 c,, r,, r f, (2) which also consists of a uantity-deendent art and fixed cost., is the entrant s marginal cost for all items handed over to the incumbent with being the entrant s marginal end-toend cost with resect to uantity, marginal delivery cost and the access rice. ail which is delivered by the incumbent through an access agreement costs the entrant lus the marginal cost of collection and rocessing. is a arameter weighing fixed costs. elivery cost, which deends on the number of households served, is not fixed as in the incumbent s case but convex in market coverage r with arameter. This reflects high time cost of delivery in rural areas with low oulation density. Senders gain utility V (3) from the uantity of letters sent. For simlicity, we assume that mail demand treats letters of different weight and size as homogeneous. When discussing market oening by letter category below, we simly assume that different ortions of a homogeneous market are being oened. emand is given by (4) with rice elasticity. nd-to-end demand to the incumbent consists of uantity demanded in the monoolized art of the market lus the demand in the cometitive segment,,., (5) n the monooly segment, the incumbent faces demand mr (6) The monooly segment s borders are defined by the degree of market oening m and the entrant s choice of market coverage r. This formulation imlies that total market demand deends on the incumbent s rice only. This is a justifiable simlification as long as the incumbent remains the dominant layer in the market. 6 n the simulations below, the incumbent s rice is set constant, such that total mail volume is constant as well. n the comlementary art of the entire market, the incumbent faces end-to-end demand 6 This simlifying assumtion imlies that cometition does not stimulate total demand. t ignores the emirically established fact that the roducts of the universal service rovider and the entrants are imerfect substitutes, and that cometition indeed increases total demand (see Pearsall, 2005).

7 ncumbent arket Share, mr s (7) where s market share s is given by 0 s if if if 0 0,., The constant switching elasticity in the cometitive market segments is 0. Note s : : s that this formulation of the switching function yields iso-elastic individual demand functions. t gives the incumbent the advantage of serving the whole market if rices are eual; the entrant is able to gain market share only by undercutting the incumbent s rice. 7 Hence, the rice elasticity of the incumbent s demand is 0 c.. Figure 3 illustrates the incumbent s market share as a function of the entrant s : relative rice. (8) Figure 4: ncumbent market share as a function of the entrant s relative rice. n the served market, the entrant faces end-to-end demand,,,r mr s (9) while the uantity handed over to the incumbent for delivery if access is available amounts to ,,r m r s Price ometition ntrant Relative Price (0) 7 This is a common assumtion in the literature, see e.g. the rosective U study by PriceWaterhouseooers (2006).

8 The entrant and the incumbent comete in linear tariffs. The distinction of a monoolistic and a cometitive market segment below allows the incumbent to discriminate rices between these segments. The entrant is assumed to be able to discriminate between mail delivered by herself and mail delivered by the incumbent via downstream access. We assume tight incumbent rice regulation, such that only the entrant is able to freely choose its rice: The incumbent s monooly and cometitive rices and are exogenously set by the regulation authority. f access is available, given these rices and the otimum extent of market coverage r,, the entrant then determines otimum rices,,, by solving the following : max c,,,,,,, r,,,, r,,, r,,, r,,, with the first-order conditions being,, (2) r, The entrant s marginal cost with resect to uantity for, and, d d,,, with and without access is, resectively. There is no closed-form solution to (2). Note, however, that in the case it yields. Total differentiation then yields such that 2 (3) () d 0. d (4) Hence, the first-order condition satisfies the entrant s non-negative rofit condition whenever serves a ositive market share. Figure 5 illustrates numerical solutions for different values of the s marginal cost.

9 =0.3 =0.2 =0. 0 Figure 5: ntrant s rice (dashed lines) given the incumbent s rice for 0,0.,0.2,0.3. Hence, whatever the incumbent s rice, the entrant will almost linearly underrice it as long as her rice exceeds marginal cost. 8 These considerations comlete the characterization of the second ste in the decision timeline. The euilibrium in rice cometition is the basis for the entrant s entry decision. 5. arket ntry n this section, we study market entry first without and then with the availability of downstream access to delivery. 5. ownstream Byass without ccess Without access, the entrant has the choice of market coverage max r, 0, =0 c,,,,,,,, r,, r,, r, ncumbent Price (6) 8 n the secial case of 0, i.e. if the entrant has zero uantity-deendent marginal cost, we have. (5) The assumtion of zero uantity-deendent marginal cost is reasonable as long as the entrant does not oerate at her caacity limit. The business case of ityail in Sweden, who conveys only electronically rocessed mail, suggests that, indeed, an entrant bears very little uantity-deendent cost which then mainly consists of the delivery cost related to the number of served households. See WK onsult (2006) for a discussion of ostal business models in various countries of the uroean Union.

10 The marginal cost of extending market coverage consists of the (rogressive) fixed costs due to delivery to ever more remote laces. The marginal benefit is the er-iece rofit of additional items. xloiting the first-order condition yields m, s r, (7) where, s. (8) omarative statics yield that the covered area by the entrant increases in the degree of market oening, r / m 0, while its reaction to the degree of substitutability between the incumbent s and the entrant s ostal service is ambiguous, r / ownstream Byass with ccess n order to sensibly analyze access in our model setting, we have to restrict the interretation of the r - dimension to geograhical coverage. denotes the area-indeendent er-iece access charge the entrant ays to the incumbent, the amount of which is art of the regulatory setting. Since access is assumed to be area-indeendent, the entrant chooses full coverage access and offers full coverage to its customers (by own delivery or access), conseuently iff, which we assume to hold. Given this, the entrant s roblem is to choose the degree of market coverage (own delivery) that maximizes rofit: max r, 0, c,,,,,,, r,,,, r,,, r,,, r,,, in which r, denotes own coverage where no access is used. With access, the marginal cost of, extending market coverage also entails (rogressive) fixed costs. The marginal benefit is the difference between the access rice and the entrant s marginal cost of her own delivery network. This effect is enhanced by the larger market share s s in the cometitive segment due to a lower otimum rice. Hence, from the first-order condition we get, m, s,, s r, (20) where s is as in (8) and r,, (9)

11 , s. (2) Since we assumed that, comaring (20) to (7) yields r, r,. So, access induces the entrant to reduce her own delivery coverage. 90% overage 85% 80% 75% 70% 65% 60% 55% 50% 45% overage with ccess (Full arket Oening) overage without ccess (Full arket Oening) overage with ccess (Partial arket Oening) overage without ccess (Partial arket Oening) 40% ccess Price (HF) Figure 6: arket entry decision Figure 6 shows the entrant s market entry decision as a function of the access rice. arket coverage is generally lower with access than without as in this case fixed delivery cost can be saved. s the access rice increases, also own market coverage increases as the entrant s own delivery channel becomes relatively more attractive. 5.3 Worksharing Only Under worksharing, the market for ustream services and consolidation are oen comletely to cometitors, but final delivery is reserved to the incumbent. This regulatory framework is essentially the one currently in lace in the US. 9 The regulatory setting comrises the area-indeendent er-iece worksharing discount the entrant ays to the incumbent. This defines the access charge. Since access is assumed to be area-indeendent, the entrant chooses full coverage access and offers full coverage to her customer. omared to downstream byass, worksharing with access induces the entrant to increase delivery coverage while at the same time waiving the cost of establishing a arallel delivery network. The entrant hence bears only the ustream marginal cost c f., and fixed cost: f (22) 5.4 Welfare 9 See Haldi and Olson (2003) for a descrition of the US worksharing system.

12 n this section we discuss the effect of market oening and access regulation on overall welfare. Welfare is comuted as the sum of all oerator rofits lus the consumers net utility from mail consumtion W V V,,,, c c, There are two differences between the incumbent and and the entrant: First, the incumbent has to fulfill a USO (with full area coverage), while the entrant is free to choose the otimum degree of market entry. Second and based on the first difference the entrant has lower fixed and variable costs due to its higher entrereneurial flexibility. onsider the first-order necessary condition for internal solutions to the welfare-otimal access rice dw d r d d, d 0. d d 0 d 0 d 0 d From a welfare oint of view, with byass, the access rice has three direct effects on welfare: 0 high access rice induces the entrant to extend her own delivery network and reduce the use of downstream access, resulting in higher overall delivery cost due to network dulication. This is the effect described by the first art on the right-hand side of (24). t also shifts demand for end-to-end services from the entrant to the less efficient incumbent (Second exression on the right-hand side of (24)). ue to a high access rice, the remaining (lower) mail volume collected by the entrant is rather self delivered than handed over to the incumbent for delivery, hence using the entrant s (marginally) more efficient technology. This is reflected in the third and fourth art on the righthand side of (24). Hence, our result assures that the efficient degree of market entry is chosen, which corresonds to the logic behind the PR. n the worksharing scenario (without byass) the first and the third term on the right-hand side of (24) are zero: The scoe of the entrant s delivery network and hence also the volume d d she delivery herself are fixed to zero. Then, once market entry has taken lace and because, the otimal access rice is not defined in general: s long as, the access rice must be indefinitely low in order to assure that no volume is rocessed by the inefficient incumbent. Based on the above considerations, a very low access rice seems otimal with and without byass. However, lowering the access rice increases the entrant s rofit relatively more than overall welfare and therefore encourages inefficient market entry in the first lace, as we will show in the simulations below. t also uestions the financial stability of the incumbent and hence the financial viability of the USO in the long term. 6. Scenario nalysis The calibration of the model is exactly the same as in Jaag (2007a). n this section we discuss various market oening scenarios with resect to their effects on the incumbent s market share and rofitability. Note that the model resented in the revious section discusses euilibrium effects only. Hence, the d d : (23) (24)

13 analysis does not ermit statements on the short-term effects of olicy changes. We focus on two market oening scenario classes: Full market oening with no reserved area and artial market oening ( m ) with a reserved area for letters weighing less than 50g ( m 0. 3). ue to the affordability constraint on rices imosed by the USO, in all scenarios we kee the incumbent s rices constant: The following scenarios are simulated:. arket oening without access; 2. arket oening with access; access rice based on the retail rice minus the avoided cost of collection and rocessing; 3. arket oening with access; access rice based on the marginal cost of delivery; 4. Worksharing with a monooly, mandated downstream access; access rice based on the retail rice minus the avoided cost of collection and rocessing. 5. Worksharing with a monooly, mandated downstream access; access rice based on the marginal cost of delivery. 6. s a reference (RF), the status uo with a reserved area below 00g and no access. Table 2 summarizes the simulation results of artial market oening with resect to market entry, the resulting euilibrium rices, and the imact on rofits and emloyment; a discussion follows below. Scenario PO PO2 PO3 PO4 PO5 RF ,, r, 0.66 r, , , , , W ,, W Notes: in chf; in millions; relative to scenario RF. Table 2: Partial market oening: Simulation results Table 3 reorts the simulation results of full market oening. n the scenarios where the mail market is only artially oened (e.g. only for letters weighing more than 50g, as reorted in table 2), without access, entrants cover 66% of the market in euilibrium. The corresonding number with full market oening is 83%. Note that the overall mail volume is constant due to the assumed freezing of the incumbent s rice.

14 With the ossibility of access, the entrant s scoe of delivery is exected to decline. n our simulations (comaring scenarios PO to PO2 and PO3), this is only the case if the access rice is sufficiently low. Otherwise, access is an unattractive choice for the entrant which is hardly drawn uon: The entrant s otimum rice in the market segment handed over to the incumbent for delivery is just not cometitive. Scenario FO FO2 FO3 FO4 FO5 RF , , r, 0.83 r, , , , , W ,, W Notes: in chf; in millions; relative to scenario RF. Table 3: Full market oening: Simulation results The entrant rofits from the otional oortunity of access to the incumbent s network at any rate. lso, the incumbent can rofit from such an agreement, but only if the access rice allows her to retain the margin of her end-to-end roduct. n the access and worksharing scenarios, the entrant faces higher marginal costs than with a rorietary delivery network. This results in a higher rice, but lower fixed costs. n the worksharing case, the retention of the downstream monooly allows the incumbent to cover her fixed costs due to large volumes. From a welfare oint of view, among all scenarios, access and worksharing erform well with low access rices since they avoid the multilication of fixed costs. However, comlete market oening along with regulated access and high worksharing discounts would challenge the incumbent even more than liberalization without byass access. This is due to the amle cherry icking oortunities entrants would have in such a system. low access rice also bears the risk of inefficient entry into the market. This can be seen from the last row in tables 2 and 2. large negative value of the difference in welfare and the entrant s rofit shows that entry is much more attractive for the entrant than for society.

15 3'000 Quantity (m tems) 2'000 Quantity (m tems) '800 2'500 '600 2'000 '400 '200 '500 ' ncumbent Quantity () Workshared Quantity () ' ncumbent Quantity () ntrant Quantity () Workshared Quantity () Figure 7: Quantities without Byass Figure 8: Quantities with Byass Figure 7 shows the incumbent s and the entrant s uantities as a function of the access charge. high charge induces the entrant to set a high rice (see figure 5) which decreases his volume. s total volume deends only on the incumbent s rice, it is unaffected by a change in the access rice. lso with byass (Figure 8), the workshared volume decreases in the access rice. However, as the entrant is now allowed to (artially) redirect volumes to her own network, the loss in market share is much lower than without the ossibility to byass Profit (mhf) ncumbent Profit with Byass ntrant Profit with Byass ncumbent Profit without Byass ntrant Profit without Byass ncumbent Profit without ccess ntrant Profit without ccess ccess Price (HF) Figure 9: Profits in different scenarios Based on the market shares as shown in Figures 7 and 8, figure 9 shows the corresonding rofit levels in different scenarios. The incumbent s rofit increases in the access rice. Without the entrant s ossibility to byass, it rofits the most from an access rice increase. f byass is allowed, with a high access rice, it is attractive for the incumbent to offer access to its delivery network with resulting rofits from higher downstream volumes. The entrant always loses if the access charge is increased as this reduces s delivery otions. However, even with a high access rice, the entrant is never worse off than without access: f it is too exensive, it is just not used. 7. onclusion Following the ostal liberalization rocess in the uroean Union, Switzerland intends to further oen its ostal markets in the years to come, albeit for different reasons. While one of the main reasons for liberalization in the U is the accomlishment of the ostal internal market, Switzerland aims at finding an efficient means to rovide a high level of universal service obligations. arket oening indeed invites cometition, but it may also resent challenge to financing the USO currently in lace. USO financing under entry is challenged both by the loss of revenues and scale economies in combination with the affordability constraints on ricing. The incumbent and the entrants would benefit from downstream

16 access as comared to end-to-end cometition if the access rice is set according to avoided cost. This is due to a better cost allocation between oerators. t lower access rices, the incumbent loses margin and therefore incurs losses. oncerning overall welfare imlications of downstream access, the simulations reorted here yield robustly negative results with byass. Positive effects can be exected with a worksharing regime and access rices oriented at avoided cost. ost differentials in the delivery function between the incumbent oerator and entrants, and the associated efficiency gains, are catured in our model. The model does not reflect, however, welfare gains that might result from entrants roducts being imerfect substitutes for the incumbent s roduct. These effects of roduct innovation may be rimarily in the worksharing domain: hanges in roduct mix and welfare related to delivery otions under full liberalization robably less imortant than ustream benefits of worksharing. 0 Our simulations show that regulated access might sur cometition in the ustream market while reducing cometitive ressure downstream. Positive welfare effects of downstream access can only be exected if the multilication of cost due to entry is overcomensated by a better overall cost allocation among oerators. However, in these situations, inefficient entry into the market by cherry icking is most likely. Granting the universal service rovider flexibility in her ricing and roduct range decisions reduces this threat. We find that downstream access is an attractive means of entry for new cometitors as it hels to avoid delivery fixed cost. However, it may also be attractive for incumbents as it hels covering the fixed costs already incurred and could well add to total volumes by stimulating demand through ustream cost savings and roduct innovation. References rmstrong,. (2006): ccess Pricing, Byass and Universal Service in Post, London: University ollege, mimeo. rmstrong,.,. oyle, and J. Vickers (996): The ccess Pricing Problem: Synthesis, Journal of ndustrial conomics, 44(2). Baumol, W. J. (983): Some Subtle Pricing ssues in Railroad Regulation, nternational Journal of Transort conomics, 0( 2). Baumol, W. J., and J. Sidak (994): The Pricing of nuts Sold to ometitors, Yale Journal on Regulation,. rew,.., and P. R. Kleindorfer (200): Whither the USO under ometitive ntry: icrostructure roach, in Future irections in Postal Reform, ed. by.. rew, and P. R. Kleindorfer, Boston. Kluwer. de onder, P. (2006): ccess Pricing in the Postal Sector: Theory and Simulations, Review of ndustrial Organization, 28(3). ietl, H.., U. Trinkner, and R. Bleisch (2005): Liberalization and Regulation of the Swiss Letter arket, in Regulatory and conomic hallenges in the Postal and elivery Sector, ed. by. rew, and P. Kleindorfer, Boston. Kluwer. Farsi,.,. Filiini, and U. Trinkner (2006): conomies of Scale, ensity and Scoe in Swiss Post s ail elivery, in Liberalization of the Postal and elivery Sector, ed. by.. rew, and P. R. Kleindorfer, heltenham. dward lgar. 0 See Pearsall (2005).

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