Abstract
Incumbent operators providing universal services are increasingly active in competitive markets, which raise the issue of cross-subsidization. We analyze the competitive and welfare properties of the Swiss net cost balancing mechanism (NCB) applied since 2013 in the postal sector, and compare it to the traditional fully distributed cost approach based on activities. We find that NCB resolves the relevant competitive concerns while having superior welfare properties.
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Notes
- 1.
For more details on the implementation in the Swiss Postal market, see Jaag and Maegli (2015).
- 2.
As a side effect, net cost balancing makes it possible for a USP to separate operational accounting from regulatory accounting: In a first step, cost can be allocated according to regular accounting principles (business accounting); in a second step, the net cost balancing is carried out in the form of transfer payments (regulatory accounting).
- 3.
If net costs are not compensated (see a), they are a real opportunity cost and should be accepted.
- 4.
- 5.
Formally, Faulhaber‘s incremental cost test is to be applied to individual services and to all possible groups of services. In a two-product company with break-even constraint, this translates to the restriction that pixi ≥ cixi + Fi. If there are no product-specific fixed costs (Fi = 0), the restriction simplifies to pi ≥ ci, i.e., prices must exceed variable cost. For analytical convenience, the latter is assumed in the formal part of the analysis (Sect. 2). The results are nevertheless in line with the numerical findings in Sect. 3 (which assume Fi > 0).
- 6.
Price regulation can represent a means for (partial) financing of the USO; see Jaag (2013).
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Haller, A., Jaag, C., Trinkner, U. (2020). Funding the USO: Cross-Subsidization and Net Cost Balancing. In: Parcu, P.L., Brennan, T.J., Glass, V. (eds) The Changing Postal Environment. Topics in Regulatory Economics and Policy. Springer, Cham. https://doi.org/10.1007/978-3-030-34532-7_10
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