Abstract
Postal Universal Service Providers and traditional mail carriers continue to face the dual challenge of falling demand and traditional regulation. Between 2007 and 2011, mail volumes fell by an average of 15 % across Europe, falling by 3.2 % per year in Ireland and 6.4 % per year in the UK (Niederprüm 2013). As certain services fall under the Universal Service Obligation (USO), Universal Service Providers (USPs) are obliged to continue to offer these services. In order to finance the USO, USPs often seek to increase prices on certain products. This has been the case in the postal sector; for example, An Post increased the tariff on letters up to 50 g by 5 cent in 2013, while Royal Mail increased the tariff on the same product by 2p to 3p in 2014. As USO products, these price changes must be approved by the regulator.
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Notes
- 1.
In general, affordability of postal products is more likely to be an issue for low income groups.
- 2.
While affordability is a legal requirement, its interpretation is typically inclined towards residential consumers rather than business consumers. Although there are potentially affordability concerns for all business consumers, the focus might be on small business customers. It could be argued that regulators should not aim to protect one large firm from another and in any case, promoting prices which are aligned towards cost will ensure some level of welfare maximisation in which business consumers receive the best prices.
- 3.
While we do not provide a detailed mathematical description, we would note that the original AIDS model framework is based on the notion of the expenditure function, the indirect utility function, and an assumption of invertibility between the expenditure and indirect utility function. As such, the original formulation of the AIDS model thus assumes optimality of the indirect utility function due to the consumer utility maximising behavioral assumption. Therefore, by the envelop theorem, the change in utility with respect to any change in price, gets multiplied by the change in utility with respect to the own quantity, which is zero by the first order conditions. The price change thus only impacts through the expenditure impacts, which result in the expenditure share equations, which are the foundations of the AIDS and PC AIDS models. An interesting and potential further line of research might be to relax the maximizing assumption, and assume that not-affordable somehow was then a deviation from an optimal utility-expenditure point in the price-income-utility space of a consumer, but for now, this is beyond the scope of our work.
- 4.
Swinand and Hennessy (2014).
- 5.
There is of course the possibility that the change in postal prices indicates a change in the mix of an aggregate bundle of necessities, such as food; in other words, consumers could substitute from expensive food to cheaper food. Our methodology, in theory, could cope with this as one of the benefits of the PCAIDs method is that it can be broken down into further categories if the budget shares data are available. We do not have a detailed breakdown of cheap food and expensive food from the HBS, however.
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Swinand, G., Hennessy, H., O’Meara, G. (2015). A Demand System Approach to Affordability. In: Crew, M., Brennan, T. (eds) Postal and Delivery Innovation in the Digital Economy. Topics in Regulatory Economics and Policy, vol 50. Springer, Cham. https://doi.org/10.1007/978-3-319-12874-0_9
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