Postal services are an important part of modern economies' communication and
distribution infrastructure. They provide a distribution system for
information and goods that connects communications and logistics, and often
add important financial services to support economic transactions. Numerous
industries directly or indirectly depend on the postal industry.\footnote{%
Examples are e-commerce, banking and insurance, and advertisement and
marketing industries.}

Stepwise market liberalization and privatization of former public postal
monopolists pursue the goal to enhance the efficiency of the postal service
sector. The creation of a level playing field that ensures fair competition
is an important element of the liberalization process. The general trend to
introduce competition in the postal industry is possibly most visible in
Europe. Since the European commission published a Green Paper on the
development of the internal postal market (EU\ 1991), the reserved monopoly
areas of public operators were reduced three times (1999, 2003, 2006), and
the Europe-wide full market opening is envisioned by the end of 2012 at
latest.

In the telecommunications industry, regulation is based on the existence of
fundamental market failure in network industries due to network effects in
combination with natural monopoly properties and large sunk costs which lead
to substantial barriers to entry. Regulation basically is justified by the
economic rationale that it is impossible to achieve efficient competition
under these conditions. Access regulation is based on the identification of
essential facilities (or \textit{monopolistic bottlenecks}) and aims at
providing efficiency incentives for the incumbent firms and inducing
(efficient) entry and competition in the remaining potentially competitive
parts of the industry. Accompanying retail price regulations prevent the
abuse of monopoly power in retail markets which are dominated by the former
state-owned monopolists.

Recent trends in the EU show that postal service markets are likely to be
regulated as if they essentially shared the characteristics with the
telecommunications sector. The alleged similarity, however, disappears when
we study technological and economic features of postal service markets
precisely.

In the following, the two instruments \textit{downstream access} and \textit{%
retail price regulation}, typically used in telecommunications regulation,
are discussed and assessed from the postal sector perspective. Our
comparison provides transparent illustration of the differences and allows
to highlight the specifics of postal markets.

\section{Network Regulation}

\subsection{Competition and Economic Efficiency}

In principle, competition is expected to lead to economically efficient
allocations with respect to both static and dynamic efficiency. The
underlying reasoning is based on the firms' incentives to maximize their
profits as well as a number of additional assumptions concerning the market
structure and the firms' conduct.

First, in order to avoid monopolistic and thus inefficiently high consumer
prices, each firm has to face either actual or potential competitors. Low
entry barriers as well as the firms' ability to use the same or similar
technologies are basic conditions which have to be fulfilled in order to
guarantee that competitive market allocations are efficient.

Second, consumers need to have sufficient information about the firms'
prices and the qualities of the products they offer.

Finally, a number of further conditions concerning the functioning of the
legal system have to be satisfied. That is, the enforcement of agreements
has to be ensured in order to allow the parties to write enforceable
contracts that circumvent potential commitment problems and moral hazard
through conditional clauses.

Whereas the just mentioned conditions are crucial for static efficiency,
dynamic efficiency is based on efficient investment decisions and timing
with respect to both process and product innovations based on the firms'
expectations to gain competitive advantages vis-\`{a}-vis their competitors
and to earn at least temporarily supra-competitive profits. The analysis of
investment decisions in risky environments and taking into account those
firms' incentives to invest are based on the potential gains from
innovations and reveals that there is basic trade-off between static and
dynamic efficiency.

Hence, to reach dynamically efficient competition, innovations have to be
protected such that potential profits are high enough to give the firms the
right incentives to undertake risky investments in order to develop new
technologies or products. Although this basic conflict between static and
dynamic efficiency cannot be solved in a first best manner, it is generally
assumed, that decentralized innovation processes driven by expected gains
from temporarily limited dominant market positions are the most efficient
way to solve the related investment problems.\footnote{%
Concerning innovation dynamics, cf. Schumpeter (1918/1964). The question
about the relationship between market structure and innovation incentives
dates back to Arrow (1962).}

\subsection{Network Industries}

Traditionally, nearly all network industries, e.g., telecommunications,
electrical energy supply, railways, water supply and disposal, and postal
services, have been assumed to be characterized by technologies with
subadditive cost functions.\footnote{%
For a formal definition of subadditivity, cf. Baumol et al. (1982), p. 17.}
This view had led to the provision of the respective services by protected
private monopolies, public owned enterprises or directly by public
administration entities. Over time, views changed and competition is now
supposed to lead to more efficient allocations in large market segments. The
basic argument for this new approach rests on the idea that many production
processes are vertically structured. Basic infrastructures like
telecommunication cables or electricity grids are inputs for the products
and services to be carried over the networks.

Consequently, the current approach emphasizes that production processes have
to be considered such that competition should be introduced in all market
segments where the respective production technologies allow for competition.
More specifically, monopolistic provision of inputs should be reduced to
market segments where \textit{essential facilities} (or \textit{monopolistic
bottlenecks} as a slightly weaker justification for regulation) exist.
Essential facilities are inputs that are unconditionally necessary to
provide certain goods or services and that are unfeasible or too costly to
be duplicated or to be bypassed.\footnote{%
Cf. Bergman (2002), p. 110. The foundations of the essential facilities
concept originally was developed in the 1912 U.S. Supreme Court case United
States v Terminal Railroad Association of St. Louis (224 U.S., 383).} At the
same time there must not exist sufficient demand side substitution
possibilities for the service itself. Shortly, essential facilities not only
have to be non-replicable but also non-substitutable with regard to the
service they are needed for.

\subsection{Networks and Regulation}

Following the idea that competition leads to efficient market allocations
whenever the conditions mentioned above are met, regulation should be
confined to market segments where essential facilities exist. That is,
regulation should address the industry specifics that lead to market
failures, limit the firms' exercise of market power and try to prevent
abusive conduct of market dominance.

\subsubsection{Access Regulation}

The basic idea of access regulation relies on the concept of essential
facilities. If the provision of goods or services is based on the use of
essential facilities, the right to use these facilities should allow for
competition in all other market segments. If firms face the same conditions
to use the respective essential facilities, there exists a level playing
field such that market entry and actual or potential competition between
firms leads to efficient allocations.

Thus, access regulation tries to combine competition in potentially
competitive market segments with a regulated monopoly where it cannot be
avoided (or where a legal monopoly is granted). Access regulation grants
competitors access to elements or parts of the production chain. Table 1
provides some examples for regulated access in network industries.

%TCIMACRO{%
%\TeXButton{Exampletable}{\begin{center}
%{
%\begin{threeparttable}
%[htbp]\centering
%\caption{Examples of downstream access in network industries
%\label{tab:tableexda}}
%\vspace{3mm}
%\begin{tabular}{l l l}\hline
%Industry & Downstream access to & Competitive segment \\\hline
%Electricity	& Distribution grid	& Generation \\
%Rail transport	& Rail tracks	& Transport operations \\
%Telecommunications	& Local loop \superscript{1} &	Long distance networks \\
%Water	& Supply and disposal & Treatment \\ \hline
%\end{tabular}
%\begin{tablenotes}\footnotesize 
%\item[1] Under Calling Party Pays regime, call termination service is also an essential facility.
%\item[2] Source: modified from Haucap and Dewenter (2007, chapter 1).
%\end{tablenotes}
%\end{threeparttable}
%}
%\end{center}}}%
%BeginExpansion
\begin{center}
{
\begin{threeparttable}
[htbp]\centering
\caption{Examples of downstream access in network industries
\label{tab:tableexda}}
\vspace{3mm}
\begin{tabular}{l l l}\hline
Industry & Downstream access to & Competitive segment \\\hline
Electricity	& Distribution grid	& Generation \\
Rail transport	& Rail tracks	& Transport operations \\
Telecommunications	& Local loop \superscript{1} &	Long distance networks \\
Water	& Supply and disposal & Treatment \\ \hline
\end{tabular}
\begin{tablenotes}\footnotesize 
\item[1] Under Calling Party Pays regime, call termination service is also an essential facility.
\item[2] Source: modified from Haucap and Dewenter (2007, chapter 1).
\end{tablenotes}
\end{threeparttable}
}
\end{center}%
%EndExpansion

In all cases, the starting point for access regulation is imperfect
competition based on the existence of a monopolistic bottleneck and the
observation that even if the owner of the monopolistic bottlenecks is not
vertically integrated, unconstrained monopolist behavior would lead to an
abuse of the monopolistic market power and thus inefficient allocations.

Additionally, the introduction of competition by means of regulated access
might be desirable even at a loss in economies of scale and increased
overall costs\footnote{%
Overall costs might increase furthermore from technical and organizational
co-requirements.} mainly for two reasons:\footnote{%
See Laffont and Tirole (2000), p. 100.}

\begin{itemize}
\item Competitors might offer differentiated services, improving the match
with consumer preferences, and

\item they might offer existing services at lower prices due to lower
(downstream) production costs, e.g., for retailing and lower profit margins.
\end{itemize}

Downstream access regulation therefore pursues a dual purpose: First, it
aims at improving the incumbent operators' incentives for efficiency and,
second, it aims at encouraging (downstream) competition.\footnote{%
See Laffont and Tirole (2000), p. 37.} Access policy has to balance the
efficient use of existing networks and entry including successive
investments in complementary assets and efficient bypass in order to achieve
the market structure being most efficient in the long run.\footnote{%
See Vogelsang (2003).} \\[2ex]
\noindent \textit{Instruments and Access Charges} \\[1.4ex]
\noindent In cases where access regulation is introduced, access (and
resale) obligations include a wide range of possibilities that are
asymmetrically imposed on the owner of the essential facility.\footnote{%
Symmetric downstream access usually is applied in cases where access to the
final users is needed, as e.g. in the case of termination monopolies. In
these cases, the distinction between one-way- and two-way-access depends on
the characteristics of the access-seeking firm.} Regulated access implies
not only non-discriminatory access to physical resources and corresponding
pricing to effectively lower entry barriers. In order to ensure a level
playing field, further remedies may be necessary. To address the problem of
exclusionary abuses, even more intrusive additional structural measures like
divestiture obligations (\textquotedblleft ownership
unbundling\textquotedblright ) might be used. In any case, access regulation
cannot prevent dominant positions and only reduces the incentives for
anti-competitive conduct. The effectiveness of access regulation depends to
a large extent on the national regulatory agencies' monitoring effectiveness.

Considering the design of access charges, the main problems are to encourage
efficient third party entry, and encourage efficient network investment and
network utilization, while being manageable.\footnote{%
See Vogelsang (2003), p. 832.} The two major problems concerning access
charges are based on \textit{i)} the observation that deviations from
marginal cost pricing are necessary in order to ensure that the regulated
parts of the network can be operated profitably and \textit{ii)} the fact
that any distortions due to imperfect competition on downstream markets have
to be taken into account as well.

Focusing on the first problem, theoretically optimal access charges are
based on the classical \textit{Ramsey} rule. Such access charges minimize
the efficiency loss due to their inequality to the marginal cost of getting
access. They are based on both marginal costs as well as the properties of
the demand functions in downstream markets. However, the informational
requirements of such access charges as well as the necessity to adapt access
charges whenever demand or cost change imply that they cannot be implemented
without high costs of the regulation itself.\footnote{%
See Neu (1993).}

For the determination of the level of access charges, one has to decide
between historic cost and forward-looking cost. While cost measures based on
historic costs guarantee that the incumbent's actual costs can be covered,
the related access charges may lead to inefficient investment decisions of
competitors. For example, with technological progress and decreasing network
costs, they tend to induce too much investment by competitors inasmuch
historic costs and thus the respective access charges are higher than the
actual opportunity costs.\footnote{%
See Armstrong (2002), pp. 334-337.}

Access charges based on forward-looking costs (FLC) mitigate this problem
since costs are calculated such that they reflect the costs for setting up
the respective infrastructure at the moment. However, with costs that are
decreasing over time, FLC imply that the actual costs of the regulated firm
might not be fully covered. Furthermore, compared to historic costs, FLC
induce higher risk for the regulated firm. FLC are subject to technological
uncertainty and thus increase the uncertainty with respect to future access
charges. Both cost variants neglect ex ante risks with respect to future
demand. Therefore, they are not able to capture the option value of waiting
that is relevant for investment decisions under uncertainty.

Moreover, linear access charges based on simple costs measures ignore
potential economies of scale and scope from providing access either for
large scale competitors or for competitors who use different modes of
access. If price regulation gives the regulated firm the right to choose
relative access charges as well as non-linear access charges, these
mechanisms also imply that the regulated firm will distort its access
charges in order to increase its profits from either providing access or
from distorting downstream competition: Rate of Return (RoR) regulation
implies that relative access charges tend to be distorted in favor of
relatively capital intense access services. Price cap regulation provides
the incentive to use non-linear access charges with inefficiently high fixed
fees and large quantity discounts.

Additionally, access charges under both types of regulation are vulnerable
to strategic manipulations concerning downstream competition. Under both
regulatory approaches incumbents can choose their access charges such that
access in specific market segments is unprofitable. Hence, Rate of Return
regulation and price cap regulation both have to be complemented by
non-discrimination obligations and (single) price controls.

Summarizing this discussion, it turns out that it is not possible to develop
theoretically optimal access prices that rely on costs only. Hence, while
commonly used cost measures have the advantage of relatively low
informational requirements, they are not appropriate if efficient investment
decisions under uncertainty with respect to technological developments and
future demand are considered. Ignoring risk and the appropriate option
values leads to inefficiently low access charges and therefore to
inefficiently low investment incentives.

\subsubsection{Retail Price Regulation}

At first glance, retail price regulation seems to be dispensable if access
to essential facilities is regulated. Providing a level playing field,
access regulation alone should suffice to ensure competitive market
allocations on downstream markets. However, this reasoning is correct only
if one adheres to the assumption of perfectly competitive downstream
markets. In this case, retail prices would be equal to the charges for the
required access services plus the costs for the provision of the respective
downstream products or services.

These results change drastically if imperfect competition on downstream
markets and dominant market positions of vertically integrated incumbents
are considered. Then, retail price regulation serves the following two
purposes:

\begin{itemize}
\item Deterring the dominant firm from abusive practices on downstream
markets, and

\item Re-aligning price distortions induced by regulatory interventions.
\end{itemize}

While inefficiently high price levels point to monopolistic price cost
margins and predominantly harm consumers, distorted price structures as
mentioned above can serve to extract additional consumer surplus and to harm
potential competitors.

On the one hand, non-linear tariffs with properly adopted quantity discounts
serve as simple means to differentiate between heterogeneous consumers with
different willingness to pay. On the other hand, bundling effects induced by
non-linear tariffs which include more than one product can also serve as
instruments to deter entry by small scale competitors, e.g., if quantity
discounts depend on the sum of products purchased. The potentially
anti-competitive effects of non-linear tariffs in combination with bundling
or tying are reinforced if access regulation is based on simple linear
access charges that render large quantity discounts unprofitable for
competitors, thus limiting their feasible offer range, e.g., making flat
rate offers unprofitable. \\[2ex]
\noindent \textit{Rate of Return (Cost Plus) Regulation} \\[1.4ex]
\noindent The two most important approaches for price regulation were Rate
of Return (RoR) and price cap regulation. Under RoR regulation, the
regulated firm is only allowed to recover the costs and to achieve a
\textquotedblleft fair\textquotedblright\ rate of return on capital. In
practice, setting prices requires an enormous amount of data. Additionally,
the regulator sets the prices for all of the goods and services provided by
the regulated firm besides its rate of return.\footnote{%
See Guthrie (2006), p. 930.} Although they are in principle set such that
distortion of consumer behavior is minimized, often the regulated firm
provides universal service and the retail prices are regulated also to
achieve social goals, e.g., urban-rural and usage-fixed cross-subsidization.

Overall, the revenue requirement has to be calculated as the sum of the
operating expenses, depreciation, taxes and the rate of return times the
eligible asset base. It has to be noted, that the costs are the actual
embedded costs, not forward-looking costs. For calculating the revenue
requirement including a \textquotedblleft fair\textquotedblright\ rate of
return, multiple difficulties arise: \textit{i)} in multiproduct firms, the
asset base and costs have to be allocated to the different products, which
is further eschewed if accounting rules for public entities apply and 
\textit{ii)} the calculation of the cost of equity becomes central.\footnote{%
Cf., e.g., Lamdin (2003).}\\[2ex]
\noindent \textit{Price Cap Regulation} \\[1.4ex]
\noindent The price cap regulation approach uses long-run forward-looking
cost estimations for single products, or product baskets in combination with
a weighting scheme, based on a hypothetical efficient firm or (more rarely)
benchmarking. This approach allows the regulated firm to adjust its own
prices subject to the weighted average of prices not exceeding a defined
cap. Because the prices are disconnected from actual costs and the price
ceiling is fixed for a certain period of time, the firms can keep additional
profits from cost savings, and therefore price cap regulation provides
effective incentives to lower costs.\footnote{%
See Sappington (2002), p. 3.}

Flipside of the coin is that this incentive also leads to quality reduction
incentives. This can be illustrated, e.g., with a case in the UK, where
severe phone booth maintenance problems arose. To achieve service quality
targets, often the incorporation of service quality assessments, or quality
provision sanctions or incentives (which allow higher prices for better
services) shall encounter this, but require co-regulation.

Another disadvantage is the danger of regulatory taking, which refers to a
situation where regulation effectively uses the government's eminent domain
power without actually divesting the property from the property's owner.
Examples include the lowering of the price cap ex post in order to take the
profits from the regulated firm, if they were considered as excessive. In
addition to the drawback, that unexpected cost increases have to be borne by
the firm, it further increases their risk expectations, which in turn leads
to even higher necessary expected profit margins for investment than in
cost-plus regimes required.\footnote{%
\textquotedblleft Given that firms are more risk averse than the buyer
(perhaps the government or the collective of all consumers), this risk
transfer is in itself inefficient. It follows that the optimal regulation
can then be seen as a trade-off between an efficient risk allocation and
good incentives for cost control (the \textquotedblleft incentive - rent
extraction trade-off\textquotedblright ).\textquotedblleft\ Bergman (2004),
p. 19.}

Over time, the price ceiling has to be adjusted to inflation and
productivity developments, which first requires the choice of a measure of
the rate of inflation for the goods purchased by consumers. For this
purpose, either a Retail Price Index (RPI) or a Consumer Price Index (CPI))
is used. The so-called X-factor in the common RPI-X formula reflects
productivity developments and plays also an essential role.\footnote{%
The RPI-X formula first was proposed as a regulatory policy innovation by
Littlechild (1983).} The design of this factor might increase policy
credibility and reduce regulatory capture, if it employs the productivity
gains relative to other sectors in the economy and input price inflation in
a way, such that discretionary options for the regulatory agency are limited
effectively, and regulatory uncertainty, the probability of renegotiation
attempts and other might-be rent-seeking activities are reduced.\footnote{%
For a detailed discussion of the X-factor, cf. Baake and Wey (2007b).}

Not only retail price regulation may in fact be necessary if access charges
are not in line with the actual costs of using the respective network
elements or services and if downstream markets are not perfectly
competitive. Additional measures like the imposition of replicability
standards, restrictions concerning potential price cost squeezes as well as
obligations concerning the offer of unbundled products and services are
necessary to prevent (vertically integrated) dominant firms from abusive
practices on downstream markets.

These conclusions continue to hold if retail prices are regulated according
to either type of regulation. Since Rate of Return regulations as well as
price cap regulations mainly focus on the price levels they are not designed
to deal with anti-competitive effects. Similar distortions can arise under
RoR regulations. Whereas different elasticities of demand are crucial under
price cap regulation, RoR regulations provide strong incentives to offer
capital intense products at prices that are below the (undistorted)
opportunity costs of competing firms. This results from the return rate
constraint and the possibility to retain high market shares and at the same
time keeping profits low in competitive areas in order to be allowed to
extract higher profits from non-competitive market segments.

\subsection{Summary}

The modern approach to regulation of network industries relies on the notion
of essential facilities and the idea that competition should be allowed
wherever it leads to efficient market allocations. A closer look at the
implied regulatory necessities shows that the actual implementation of
efficient regulations is rather demanding. Considering dynamic efficiency
reveals that simple cost based access charges lead to inefficient investment
incentives as long as uncertainty about future developments of technologies
and demand is taken into account. Moreover, the relation between the optimal
regulation of access to existing infrastructures or essential facilities and
the incentives to invest in bypass technologies is even theoretically a
still unsolved problem.

Assessing actually used regulations like linear access charges based on
forward looking costs and price cap regulation in downstream markets shows
that these mechanisms lead to additional distortions and potential
inefficiencies. This is especially true if downstream markets are not
perfectly competitive. In order to prevent regulated incumbents from abusing
their dominant market positions simple regulatory mechanisms have to be
complemented by additional obligations which are specifically targeted at
the regulated firm's incentives to extract consumer surplus and to restrain
competition.

Therefore it becomes questionable, whether access regulation is the default
answer for network industry frameworks, especially if largely unregulated
competition would be feasible, e.g., through technological progress or in
form of intermodal competition.

\section{Downstream Access}

\subsection{Economic Rationale and Implementation in Telecommunications}

\begin{flushright}
\hangindent=3cm \hangafter=0 \textquotedblleft \textit{The fundamental
problem of all communications policy is the access network, also called the
last mile or local loop.\textquotedblright }\footnote{%
Hundt and Rosston (2006), p. 1.}
\end{flushright}

\noindent For illustrative purposes, the bottleneck elements within the
telecommunications value chain are illustrated on basis of (fixed network)
voice telephony. Voice telephony consists most basically of the services
call origination, call switching including connection, and call termination.
All of these services fundamentally rest on physical network access over the%
\textit{\ last mile} (the local loop) as well as on a suitable \textit{%
addressing scheme}. The last mile consists of the connections to the network
in the street cabinets and the access lines between the street cabinets and
the customer premises. Therefore it represents the crucial gateway for
service provision. Figure 2.1 illustrates a typical telecommunications
network.

\bigskip 
%TCIMACRO{%
%\TeXButton{Abb_IPC1}{\begin{figure}[!htb] 
%\begin{center}
%\includegraphics*[width=\textwidth]{C:/Users/sh/Desktop/IPC1-Grafik1.jpg}
%\caption{Telecommunication networks and related services}
%\label{telconet}
%\end{center} 
%\end{figure}}}%
%BeginExpansion
\begin{figure}[!htb] 
\begin{center}
\includegraphics*[width=\textwidth]{C:/Users/sh/Desktop/IPC1-Grafik1.jpg}
\caption{Telecommunication networks and related services}
\label{telconet}
\end{center} 
\end{figure}%
%EndExpansion

Additionally, telephony networks are service specifically optimized
infrastructure-tied networks.\footnote{%
Further examples for such networks include electricity, railway and water
networks.} Services are provided over an electronic network which starts at
the end user device interfaces in the facilities of the customers and
connect the users bi-directionally over street cabinets, local and long
distance exchanges which are permanently physically connected. To install
such a network, substantial construction work is required in order to set up
the facilities required. Once in place, the subsequent costs are largely
independent of the actual network usage.

Usually, the last mile is considered to represent an essential facility,
while undisputedly being a natural monopoly (for a given fixed network
technology) and the least replicable input. Whether monopolistic bottleneck
elements in the telecommunications are true essential facilities or
\textquotedblleft near-essential\textquotedblright\ facilities (as titled by
the Canadian Radio-Television and Telecommunications Commission), depends
not only on the costs for duplication given of the technology used, but in
addition on the extent, to that the costs are indivisible sunk investments,
and on demand conditions. Economies of scale, scope, or density by
themselves might create a natural monopoly and high entry barriers, but are
not sufficient to constitute an essential facility. Usually, one-way access
regulation does not rest on the rigorous criteria of essential facilities
but rather on the identification of SMP of the network operator and the
expected gains from introducing competition to potentially competitive
segments.

Especially in highly dynamic industries like the telecommunications
industry, two additional aspects arise: First, technological progress might
increase the replicability of certain assets, in extreme making essential
facilities obsolete, or, more moderate, bottlenecks or possible access
points might change with the evolution of technology. One example for this
phenomenon can be observed in UK, where the evolution of BT/Openreach's
legacy telephony network to the \textit{21CN Next Generation Network}
reduced the network by one layer and, as a consequence, changed the
geographical network structure including the location of access points as
well as the technically viable options for access to the network.\footnote{%
See Ofcom (2004), pp. 17-19.} In this case, the reluctance of competitors to
the existing network and the related path dependencies led to the need to
deal with compensation claims from competitors due to stranded costs from
specific investments in infrastructure complementary to BT's former network. 
\\[2ex]
\noindent \textit{Service Competition} \\[1.4ex]
\noindent Telecommunication networks provide a wide range of possibilities
for mandated access, which generally can be classified according to the
requirement for entrants to build their own infrastructure, the extent of
control over the customer's local loop, and whether they are considered as a
transitory step towards facilities-based competition or intended to be
permanent regulation. While the entry strategies and business models that
become possible are closely related to the scope of the regulation, both,
service competition and access-based infrastructure competition might be
limited with regards to the possibilities to offer differentiated products.

Call-by-call and carrier preselection, where price competition, e.g., based
on cost or strategy advantages in marketing, is focused, are widely
considered as important step stones to introduce competition and to allow
consumers to \textquotedblleft try\textquotedblright\ competition with low
switching costs, they were also responsible for technically inefficient
(re-)routing and a lack of technological innovation.

As unbundling and line sharing were dominated by wholesale offerings in the
beginning, infrastructure investments were not really observable.\footnote{%
See Hundt and Rosston (2006).} Champeaux, Hennes and Lebourges confirm this
view, stating \textquotedblleft the 1998 telecommunications liberalization
[\ldots ] (has) a doubtful record on productivity, innovation and
sustainable entry. Concerning unbundling and wholesale obligations (there
have to be noticed) negative results for industry conduct and
performance\textquotedblright , as, e.g., network growth stop induced by
significantly increased monthly charges. In some countries, less than half
of the household are subscribers to a fixed line network, which today causes
significant problems concerning internet access penetration and usage.%
\footnote{%
See Champeaux, Hennes, and Lebourges (2006), p. 161.} \\[2ex]
\noindent \textit{Facilities-based Competition} \\[1.4ex]
Access to ducts, local loop unbundling, naked DSL, line sharing, and
bitstream access are the regulatory policy options that require
facilities-based entry. Unbundling has been introduced in the U.S. and in
the EU as the two most important legislations worldwide in 1996.\footnote{%
Federal Communications Act (1996) 47 U.S.C. \S \S\ 251-252 and Directive
96/19/EG.} Within the EU, in the meanwhile a directive dealing exclusively
with unbundling and interconnection was added to the regulatory framework.%
\footnote{%
EU (2002a).} In both frameworks, fair charges are mandated and
non-discrimination as well as transparency rules apply. The selection of
elements eligible for access in both legislations is based on the concept of
market power (SMP). Furthermore, with the exception of Mexico, in the
meantime all OECD countries require some form of local loop unbundling (LLU,
as downstream network access usually is called in telecommunications),
although with a widely varying scope of the obligations imposed.\footnote{%
Cf. OECD (2007), pp. 53 ff.}

The theoretically predicted difficulties arose in all areas, concerning the
discrimination incentives between competing firms (especially the question
whether to prevent the rollout of competing networks with low access
prices), concerning mutual dependencies, as illustrated above for the 21CN
restructuring case, and that with complementary assets, investment and
innovation are expected to be higher for vertically integrated systems.
Additionally, fierce discussions of the access terms (on prices, qualities,
requirements) and extensive renegotiation attempts could be observed.

Considering the access pricing, according to the U.S. \textit{Total Element
Long-Run Incremental Cost }(TELRIC) approach, a rate for each network
element is calculated. Thereby the approach ignores the fact, that the lack
of compensation for investment risks is anticipated by investors, thus
leading to underinvestment. At least, to account for historical decisions
(and related path dependencies), in some cases certain elements of the
network are considered as given instead of being variable, e.g., the network
node buildings.\footnote{%
Similarly, the EU the \textit{Cost of Efficient Service Provisioning} are
calculated (which can be regarded similar to a \textit{Total Service
Long-Run Incremental Cost} (TSLRIC) approach). Both concepts share the
attempt to determine the (hypothetical) costs of an efficient
cost-minimizing firm with an optimally configured network built with an
efficient technology. For a more detailed discussion, cf. Vogelsang (2003),
pp. 840 ff.} Generally, access obligations and the related price controls
have high information requirements. Hence, the best choice strongly depends
on the incentives and ability of the regulatory authority to carry out the
related analysis methods. \\[2ex]
\noindent \textit{Additional Requirements} \\[1.4ex]
\noindent With access regulation, overall costs increase additionally from
technical and organizational co-requirements, e.g., from the implementation
of accompanying co-location space, access management services and
measurements to reduce switching costs (like number portability). Also, in
most cases behavioral remedies to the problem of bottleneck governance are
unlikely to be successful in eliminating anti-competitive practices,
especially in the case of detoriated access quality, long service request
response times and other non-pricing anticompetitive behavior.\footnote{%
See Lyon (2000), p. 79.} \\[2ex]
\textit{Vertical Separation} \\[1.4ex]
\noindent Following the logic to separate monopolistic and competitive
market segments, the most consequent measurement is structural or vertical
separation that re-establishes a separated monopoly which can be interpreted
as an access obligation with the extended requirement of ownership
divestiture. In infrastructure based networks, one central issue often is to
what extent vertical integration should be allowed. Vertical integration
alters the industry performance by changing the composition and the nature
of downstream competition (direct welfare effects), where retail supply can
enhance competition and by affecting the incentives to discriminate
(indirect welfare effects) against rivals.\footnote{%
E.g., by seeking to extract rents or at least raising their costs,
exaggerating input costs, or degrading the quality of the supplied input,
burdensome purchasing requirements or delaying access.} Thereby, the merits
of vertical divestiture vary with type and competition in the retail market,
scale and scope economies, relative social value of consumer surplus and
profits. The empirical evidence varies strongly for different industries,
countries, and firms.

A further point concerning vertical separation is, without full ownership
divestiture, that if it is correctly implemented, the upstream company is
effectively shielded from competitive market forces, if not, discrimination
incentives remain.\footnote{%
See Sappington (2006).} \\[2ex]
\noindent \textit{Regulatory Timing} \\[1.4ex]
\noindent Considering dynamic efficiency, regulation biased in favor of
service-based competition is likely to pre-empt efficient investments and
sustainable competitive market structures. Concerning access to elements of 
\textit{Next Generation Access Networks} (mainly pure fiber or
fiber-copper/coax-hybrid networks as successors of the legacy twisted-pair
copper cables), the regulatory authorities are more reluctant to impose
regulation in order to keep investment incentives high. Additionally it is
taken into account that the investments necessary are substantial and to a
large part sunk in their nature, but nevertheless relevant due to investors'
capital remuneration expectations.

One example for such regulatory scrutiny has been the amendment to the
German telecommunications law (Telekommunikationsgesetz, TKG) which included
explicitly dynamic aspects, favoring a hands-off policy. The newly added \S\ %
9a (1) stated, that new markets principally should stay unregulated. \S\ 9a
(2) still allowed for regulation of new markets, but only if two conditions
are fulfilled: \textit{i)} there are facts that justify the assumption that
without regulation the tendency towards sustainable effective competition is
impeded in the long run, and \textit{ii)} particularly the aspects of
efficient investments in infrastructures and the promotion of innovations
have been considered. However, after a dispute with the European Commission,
these regulations were declared incompatible with the European market rules.
Although its effectiveness is critically dependent on the definition of new
markets (a rather deliberate and complex task), the approach stimulated a
dynamic view on regulation, allowing for less stringent interventions and
even regulatory holidays, if this would have served dynamic efficiency.

\subsection{Application to Postal Markets}

Network infrastructures are not necessarily permanently connected networks.
They might also consist of a set of network nodes that are connected only
dynamically, like it is in the postal industry which mainly consists of road
and transport/delivery capacity.

Concerning this aspect, postal distribution is completely different from
physical networks like telecommunications, electricity, rail, water and so
on. Postal services are provided by a sequence of activities connecting
senders with receivers. The activities are collection, outward sorting,
transportation, inward sorting, and delivery of postal items (cf. figure
2.2).

%TCIMACRO{%
%\TeXButton{Abb_IPC2}{\begin{figure}[!htb] 
%\begin{center}
%\includegraphics*[width=\textwidth]{C:/Users/sh/Desktop/IPC1-Grafik2.jpg}
%\caption{Postal networks}
%\label{postalnet}
%\end{center} 
%\end{figure}}}%
%BeginExpansion
\begin{figure}[!htb] 
\begin{center}
\includegraphics*[width=\textwidth]{C:/Users/sh/Desktop/IPC1-Grafik2.jpg}
\caption{Postal networks}
\label{postalnet}
\end{center} 
\end{figure}%
%EndExpansion

The first concept for the European postal market was sketched in the
European Commission's Green paper of com 1992, where it was concluded, that
sector-specific regulation would be required. Today, the European framework
for postal regulation consists mainly of three directives, with Directive
COM 2008/6 EC being the most recent one.\footnote{%
EU (1997), EU(2002b), EU (2008).} This directive aims to complete the
gradual opening of the postal markets to competition by 2009, or for some
countries after another transitional period by the end of 2012.

Elements of the regulatory framework like in the telecommunications industry
are: the promotion of competition, the development of the internal market
and safeguarding or to ensure citizen interests. The EU \textit{Postal
Framework} does not impose access, but if it is mandated by the regulator,
the usual transparency and non-discrimination rules apply, and prices have
to be \textquotedblleft geared to cost\textquotedblright . The framework
also covers services of general interest and the financing thereof. \\[2ex]
\noindent \textit{Economies of Scale and Scope} \\[1.4ex]
Mail collection, sorting, transport and delivery access might exhibit
economies of scale and represent a natural monopoly in remote areas, but
economies of scale alone do not create an essential facility. Also, the
scale of indivisible sunk investments are rather low, with the possibility
to lease the equipment needed, and labor cost accounting for the by far
largest share of total cost.\footnote{%
For the European Universal Service Providers, 2002, labor cost accounted for
a share of total cost of 63\% on average (Nera 2004, p. 67).}

Concerning economies of scale, the assumption of a natural monopoly is not
justified. For sustainable competition to be feasible, entry must be
profitable, which in turn is highly interdependent with the proper design of
universal service obligations to keep the minimum efficient size of entry
low.

The estimated minimum efficient sizes of entry (the critical market share)
is country- and operations-specific, ranging from 3\% market share with two
day per week delivery (NL) to 30\% with 1 day per week delivery (UK). Actual
data seems to confess these estimates, in the Netherlands, two operators
with a market share of 2.5\% each, and in Sweden on operator with 7.5\%
overall share and 25\% share of the market segment of presorted bulk mail
for urban delivery are all profitable. The same is true for some regional
postal operators in Germany. Sunk costs seem to occur only from full-scale
or otherwise high-level entry as the high number of small licensees in
Germany illustrates.\footnote{%
See De Bijl, van Damme, and Larouche (2005).}

In addition, the economies of scope are rather limited due to different
transportation means (road, rail, air) depending on different qualities, and
also with respect to geographic differentiation. Even companies with mail,
parcels, express, and logistics operations can only share a fraction of
their networks to obtain scale advantages. Therefore, the argument of the
existence of entry barriers caused by economies of scope can be rejected
largely. \\[2ex]
\noindent \textit{Non-replicable Assets} \\[1.4ex]
While in telecommunications, the (copper) local loop (of existing networks)
in most cases seems to represent a natural monopoly, this is not so clear
for wireless and new technology networks, especially in combination with
innovative deployment technologies, which provide lower cost per added
subscriber and have different service properties, e.g., the mobility of
services.

In the postal industry, non-replicable network elements and services hardly
exist, if at all, and the economies of scale and scope are limited, if
differentiation among service providers is allowed and not narrowed too much
by regulation. The postal industry represents a production chain, of which
only few segments might be candidates to have natural monopoly properties.

One of the unique attributes of the postal industry is, that the work can be
done (at least partly) by the sender itself, e.g., (pre-)sorting or
hand-over at distant point. If there is no monopolistic bottleneck, the
postal (upstream) operator should probably find it in his own interest to
provide access in order to keep at least a part of the revenues. This, and
the vivid competition among different postal providers, the development of
electronic communications, through parcels, express and logistics operators,
print media distribution firms, and own efforts to distribute mail (e.g.,
utility companies employing own staff to deliver mail; one example for this
option provides the case of Vattenfall Europe, which permanently employed
several people to deliver invoices and other mail in Berlin) as well as
email lead to significant competitive pressure, effectively restricting the
possibilities to execute market power. \\[2ex]
\noindent \textit{Low Entry Barriers} \\[1.4ex]
In the postal industry, the requirements for access regulation generally are
not met. There are no indivisible sunk investments, entry is easily possible
at different scales, and users are free to switch their service provider,
quickly and without significant switching costs.\footnote{%
See Panzar (2008), p. 15.}

Low entry barriers and potential competition lead to efficient market
structures and allocations (see for example parcel and express services),
therefore downstream access regulation is judged to be not justified.
Regulation of \textit{worksharing}, as downstream access is called in the
postal sector is not necessary, if all potentially competitive segments are
open to competition if there are no natural, strategic or legal entry
barriers.\footnote{%
E.g., as the mail box monopoly of the United States Postal Service. Cf.
Panzar (2008), p. 18.} Not only in the industrialized countries, but
generally, \textquotedblleft on a national, regional, and global level,
private operators are playing an increasingly important role in the
provision of even the most basic postal services. As just one example of
this process, in the Latin America region, incumbent universal service
providers have a share of the postal marketplace estimated less than 40\%,
in spite of benefiting from some of the highest \textit{de jure }protection
in the world\textquotedblright ,\footnote{%
See UPU (2004).} providing evidence for the possibility for duplication.%
\footnote{%
See Panzar (2008), pp. 6-7.}

The only elements that could be identified to be susceptible to access
regulation are address and mail redirection and return databases based on
information asymmetry grounds,\footnote{%
See Panzar (2008), p. 17.} and access to post office boxes (PO boxes) in the
operators facilities, which can be compared with the termination monopoly in
the telecommunications sector. The service \textquotedblleft full coverage
delivery including PO boxes\textquotedblright\ is impossible for \textit{any}
operator, thus all operators have significant market power. Especially in
this case, agreement seems to exist, that this kind of access to subscribers
is necessary.\footnote{%
See Panzar (2008), p. 34.} For PO boxes, the possibility for freely
negotiated access exists, pointing to the antitrust approach. In any case,
if competition law alone is considered to be insufficient to cope with
market deficiencies, non-discrimination obligations concerning freely
negotiated access should be considered first.\footnote{%
Cf. also Bergman (2002).} Access regulation is justified, if a privately
negotiated solution cannot agreed upon. If regulation has to be imposed, the
principles, e.g., concerning the pricing should be applied as discussed
above. The view, that there are no non-replicable assets (at least in the
narrow sense) was confirmed by the Court of Justice of the European
Communities in the case decision Oscar Bronner v Mediaprint (C-7/97).

\section{End User Tariff Regulation}

\begin{flushright}
\hangindent=3cm \hangafter=0 \textquotedblleft \textit{As a starting point,
retail regulation can only be envisaged if and once it has been concluded
that wholesale regulation cannot suffice to achieve the regulatory
objectives set out above the retail level.\textquotedblright }\footnote{%
Brunekreeft, van Damme, Larouche, and Sorana (2005), p. 12.}
\end{flushright}

\noindent Basically, wholesale regulation may be insufficient, if an
essential input is provided by a vertically integrated operator, which is
also operating in downstream markets with imperfect competition. The
underlying sources for the resulting inefficiencies are little competitive
restraints from actual or potential entry, on the dynamic side strategic
conduct, such as foreclosure and predation, and discrimination incentives as
with regards to discrimination between other operators and between market
segments as discussed above in section XXXX.

\subsection{Economic Rationale and Implementation in Telecommunications}

Historically, in the first half of the 19$^{\text{th}}$ century in the U.S.,
for many infrastructure industries, municipal franchise contracts
administered by council subcommittees or boards were used. In most cases,
the franchises were not exclusive contracts, but the municipalities
frequently issued duplicative franchises. Price had to satisfy the
conditions to be \textquotedblleft reasonable with reference to the costs of
producing and delivering the same\textquotedblright , \textquotedblleft not
unreasonable or exorbitant\textquotedblright\ or \textquotedblleft not
exceeding the average rate charged by other cities\textquotedblright .

In telecommunications, during that time, Bell developed its long distance
voice telephony system, due to protection from the basic patent from 1879
until its expiration 1893 as a full monopoly, and since then under
competition of many entrants, especially in regions that had not been served
by the Bell system under the American Telephone and Telegraph Corporation
(AT\&T) as the parent company. 1907, Bell's president Vail started to pursue
a three part strategy including mergers with independent phone companies,
emphasis on basic research and patent purchases, and to embrace regulation
as a way to preserve monopoly power by justifying a system without
competition.

1922, the second monopoly era began, 40 of 48 states were granting the AT\&T
monopoly and regulating rates concerning level and structure, e.g., through
geographically averaged prices, with line rental fees subsidized by usage
charges, and so on. The 1934 Communications act confirmed the regulated
private monopoly of AT\&T and introduced federal regulation, administered by
the Federal Communications Commission (FCC) which was created by the act.
During the next 60 years, regulation evolved continuously, and the monopoly
area was reduced significantly. On the other hand, until the 1960's state
regulators and the FCC protected AT\&T's core monopoly.\footnote{%
Cf. Brock (2002).}

After minor steps from the \textquotedblleft Commission price setting
system\textquotedblright , in the 1960's, price regulation gradually became
cost-oriented, using a cost-plus approach or Rate of Return regulation,
although still the individual state Public Service Commissions shared this
task with the FCC. In this \textit{Rate of Return era }until 1989, prices
were set by the different regulatory bodies focusing first profit regulation
and prices and underlying costs instead of profits from the 1980's on. 
\textit{Incentive regulation} in the form of price cap regulation tried to
introduce additional incentives to increase cost efficiency and to allow
higher pricing flexibility, with a growing tendency in the 90's.\footnote{%
Price-cap regulation as proposed by Littlechild (1983) subsequently was
adopted first by the British government and instituted for the first time in
the U.S. 1989 by the Federal Communications Commission (FCC) for AT\&T
long-distance service (Acton and Vogelsang, 1989). Afterwards, this
regulatory tool quickly spread to other countries and industries.} Since
then, the FCC reregulated retail pricing and implemented different versions
of end user tariff regulation.\footnote{%
Federal Communications Act (1994), treatment of mobile services. Second
report and order, 9 F.C.C.R. 1411, Sections 3 and 332, para 12, 14-16; and
Federal Communications Act (1996) 47 U.S.C. \S \S\ 251-252.} Finally, the
1996 Communications act not only ended the second monopoly era of AT\&T,
introduced the whole set of today's requirements including unbundling,
resale obligations etc., but also implemented the forward-looking cost
orientation concept (TELRIC) as it is still used today.

In Europe, as in the U.S., telecommunication services were provided by
vertically integrated monopolists for equipment, and basic network and
service provision. The difference was that these monopolies in Europe mainly
were organized as public entities. The national telecommunications operators
at the same time were policy-makers under direct political control instead
of being a regulated firm. Performance varied across Europe.\footnote{%
For example, in France the \textit{Minitel}, or ISDN in Germany were
considered to have been considerably successful, whereas the \textit{%
Bildschirmtext} system in Germany never reached significant market
penetration.} From the 1990's on, the markets for equipment, value-added
services, mobile services, basic services, and lastly infrastructure
networks were liberalized. The national operators were restructured,
corporatized and (partly) privatized, and independent regulatory authorities
were installed. Prices were set by newly established regulatory agencies.
The evolution of price regulation towards incentive-controls in the form of
price caps in the EU mostly preceded the privatization process. \\[2ex]
\noindent \textit{Additional Pricing Requirements} \\[1.4ex]
Telecommunication and postal legislations include elements on universal
service, and related pricing. Examples for such price controls include
uniformity obligations and the definition of \textquotedblleft
affordability\textquotedblright , as well as the requirement to offer
special tariffs for low-income users. Thereby, the current framework in the
EU exhibits some contradictions. For example, the Swedish regulatory agency
claims, that the European framework imposes incompatible demands for
legislation on the member states: uniform tariffs and prices geared to cost
at the same time would be infeasible under most conditions.\footnote{%
See PTS (2000).}

In practice, a mixture of price caps and RoR regulation (based on cost
models) can be observed. In addition, discretionary ex ante approvals by the
regulatory bodies and structural requirements (uniform prices) apply and ex
post supervision of prices concerning price cost margins and price cost
squeezes is in place (cf. table XXXX). Due to the complex dependencies
within these regulatory systems, regular adjustments to changing competitive
environments are necessary, e.g., concerning the baskets, prices, or market
definitions.

%TCIMACRO{%
%\TeXButton{Priceregulationtelcotable}{\begin{center}
%{
%\begin{threeparttable}
%[htbp]\centering
%\caption{Examples of downstream access in network industries
%\label{tab:pregex}}
%\vspace{3mm}
%\begin{tabular}{l l}\hline
%
%Country &	Telecommunications service regulation (2007) \\\hline
%Canada &	Price cap or prior approval with SMP \\
%Germany &	Price cap for SMP market segments, three baskets\superscript{1} \\
%Netherlands &	Price cap for SMP operators (voice and leased lines) \\
%Sweden &	Cost plus  and price cap combined\superscript{2} \\
%United Kingdom &	Only ex post control \\
%United States &	Price cap on SMP operator \\\hline
%\end{tabular}
%\begin{tablenotes}\footnotesize 
%\item[1]  Voice, fixed, mobile.
%\item[2] Cost plus for fixed network access and capacity, price cap for leased lines.
%\item[3] Source: OECD (2007), ITU Regulatory Database.
%\end{tablenotes}
%\end{threeparttable}
%}
%\end{center}}}%
%BeginExpansion
\begin{center}
{
\begin{threeparttable}
[htbp]\centering
\caption{Examples of downstream access in network industries
\label{tab:pregex}}
\vspace{3mm}
\begin{tabular}{l l}\hline

Country &	Telecommunications service regulation (2007) \\\hline
Canada &	Price cap or prior approval with SMP \\
Germany &	Price cap for SMP market segments, three baskets\superscript{1} \\
Netherlands &	Price cap for SMP operators (voice and leased lines) \\
Sweden &	Cost plus  and price cap combined\superscript{2} \\
United Kingdom &	Only ex post control \\
United States &	Price cap on SMP operator \\\hline
\end{tabular}
\begin{tablenotes}\footnotesize 
\item[1]  Voice, fixed, mobile.
\item[2] Cost plus for fixed network access and capacity, price cap for leased lines.
\item[3] Source: OECD (2007), ITU Regulatory Database.
\end{tablenotes}
\end{threeparttable}
}
\end{center}%
%EndExpansion

At the moment, the regulatory framework is under development to meet the
challenges from buzzword processes like the deployment of next generation
networks or media convergence and the related increase in the use of
bundling in the telecommunications industry. UK still is at the
\textquotedblleft deregulatory forefront\textquotedblright : After the
vertical divestiture of BT into OpenReach (upstream) and BT
(downstream/retail division), Ofcom removed on July 31st 2006 after 22 years
all retail price controls.\footnote{%
See Ofcom (2006).} \\[2ex]
\noindent \textit{Practical Drawbacks and Caveats} \\[1.4ex]

Comparing the functions and incentives of price cap and RoR regulation, it
quickly gets clear, that the two approaches have few in common, despite the
aim to prevent the exercise of market power and to correct the associated
socially inefficient prices.

Scientific studies tried to examine the effects of incentive regulation:
\textquotedblleft In summary, the studies to date provide varied evidence
regarding the impact of incentive regulation on performance in the U.S.
telecommunications industry. Incentive regulation appears to increase the
deployment of modern switching and transmission equipment, to spur an
increase in total factor productivity growth, and to foster a modest
reduction in certain service prices. There is little evidence, though, that
incentive regulation leads to a significant reduction in operating costs.
There is also little evidence of a systematic decline in service quality
under incentive regulation.\textquotedblright \footnote{%
See Sappington (2002), p. 78.}

Design and implementation of regulation often could take a wider perspective
on long-run efficiency and include product innovation, process innovation
and intermodal competition appropriately. If quality is of concern,
introducing adequate incentives for service quality as suitable
modifications of price cap plans can be implemented in addition to
potentially existing standard price cap regulation in a variety of ways.%
\footnote{%
See Sappington (2002), p. 25.}

In competition suits, the definition of predation is of highest importance
to distinguish between competitive and anti-competitive behavior. The four
criteria to be assessed are, \textit{i)} whether the retail prices are below
a certain level, \textit{ii)} whether with intention to drive competitors
out of the market, \textit{iii)} whether with the aim to raise future
prices, and \textit{iv)} whether there exists an acceptable efficiency
defense.\footnote{%
See Brodley et al. (2000), p. 2241.} Often, the first criterion is used for
a first assessment; thereby \textquotedblleft hard-to-match
prices\textquotedblright\ can easily qualify as anti-competitive at a first
glance. Thereby, neither RoR regulation nor price caps are designed to deal
with anticompetitive effects (cf. sect. XXXX 2.3.2) or to include other
goals such as \textquotedblleft affordable uniform prices\textquotedblright\
or social tariffs. \\[2ex]
\noindent \textit{Predation, Pre-emption and Foreclosure Incentives remain}

\begin{flushright}
\hangindent=3cm \hangafter=0 \textquotedblleft Although pricing flexibility
can enable an incumbent supplier to respond to competitive pressures and
thereby prevent operation by a higher-cost rival, the flexibility can also
serve to undo cross-subsidies that regulators have implemented to promote
equity, fairness, and/or other political objectives.\textquotedblright 
\footnote{%
Sappington (2002), p. 24.}
\end{flushright}

\noindent To deter abusive practices on final consumers and competitors,
still competition policy and strict enforcement is needed. Over time,
predatory pricing, leveraging, foreclosure, tying, pure bundling, refusals
to deal, undue cross-subsidization, and raising rivals' costs strategies
were engaged to monopolize markets, with the intention to pre-empt entry or
drive competitors out of the market.\footnote{%
For an overview, cf. Spulber (2002).} The pricing flexibility might be used
implicitly for cross-subsidization, either horizontally (downstream) or
vertically to downstream. The result might be a \textquotedblleft margin
squeeze\textquotedblright , which denotes a reduction of the margin between
wholesale and retail charges by a vertically integrated dominant operator so
as to make entry difficult or to encourage exit.\footnote{%
See Geradin and O'Donoghue (2005), p. 356.} This margin squeeze imposes
additional efficiency constraints on the competitors which the incumbent's
retail branch does not have to fulfill.\footnote{%
European Commission, in DT case, OJ 2003 L 263/9, para 140.}

The formalization of such cases might happen either as margin squeeze or
predatory pricing cases. Generally, while wholesale caps usually are based
on production costs in competition policy cases, the retail floor levels
might reflect production costs, economic value or benchmark prices.\footnote{%
Cf. Haag and Klotz (1998).} Case law is mainly shaping also national
competition policy in this area. Generally, fines depend on gravity and
duration plus (or minus) aggravating (or attenuating) circumstances.%
\footnote{%
According to: Guidelines on the method of setting fines imposed pursuant to
Article 15 (2) of Regulation No 17, OJ C9, 14.1.1998, point A.} Within the
EU, national competition law proceedings were launched in numerous
countries, e.g., in Denmark, France, Italy, the Netherlands, and UK. The
cases \textit{Deutsche Telekom}, \textit{Wanadoo}, and \textit{Telef\'{o}nica%
} were the most important precedents for price abuses (respective margin
squeeze and predatory pricing) under art. 82 EC treaty. In Australia,
pricing behavior with retail prices below wholesale prices was observable.%
\footnote{%
EU (2003a, 2003b). For an overview over national cases in the
telecommunications sector see Geradin and O'Donoghue (2005), p. 355.}

Additionally pure bundling and exclusion are of concern, which both reflect
the possibility to leverage market power from an SMP-product to a non-SMP
product, as, e.g., the bundling of access and services in
telecommunications, which can be dealt with securely through competition
policy only, if the consequences are not irreversible and sufficiently
severe.\footnote{%
See Brunekreeft, van Damme, Larouche, and Sorana (2005), p. 63.}

\subsection{Application to Postal Markets}

Concerning end user tariff regulation, conceptually the same problems as in
telecommunications are likely to arise. As in telecommunications, price
regulation in practice is implemented as a mixture of different approaches
for different segments of the postal market (cf. table XXXX\ 3). The
effectiveness of price regulation might be limited by universal service
obligations, especially in combination with hybrid or partial competition.
Universal service obligations in effect may restrict differentiation
possibilities and require consistent market definitions which make highly
differentiated products or networks problematic to be handled by the
regulatory framework.

Protecting end users, intermodal competition by e-mail, fax, telephone,
short messages etc. is yet a strong disciplining market force which limits
excessive pricing. Additionally, postal service pricing is somehow simpler
than telecommunications pricing, because for private customers in most cases
only linear tariffs apply, which in turn leads to increased market
transparency. Furthermore, provider switching costs are very low because
there are no subscriber contracts, attributes which both are likely to
further restrict prices.

%TCIMACRO{%
%\TeXButton{Priceregulationpostaltable}{\begin{center}
%{
%\begin{threeparttable}
%[htbp]\centering
%\caption{Examples of downstream access in network industries
%\label{tab:pregex}}
%\vspace{3mm}
%\begin{tabular}{l l}\hline
%
%Country &	Postal service regulation (2007, DE: 2008) \\\hline
%Canada &	Price cap or single price approval, basic letter rate  \\
%& rate and single piece mail, notification in advance, \\
%& multi-year pricing plan approval \\
%Germany &	Price cap for SMP operators with ex ante approvals  \\
%& of single prices, bulk mail above 50 items/mailing \\
%& excluded, efficient-cost-concept \\
%Netherlands &	Price cap with two baskets (all products and \\
%& small users), uniformity obligations \\
%Sweden &	Cost orientation and uniformity required, only \\
%& domestic letter rate regulated, otherwise free to \\
%& set prices if compliant with competition rules \\
%United States &	Price caps and floors, increases limited by CPI,  \\
%& notification in advance, ban on below-cost pricing \\\hline
%\end{tabular}
%\begin{tablenotes}\footnotesize 
%\item[1] Source: IPC Regulatory Database..
%\end{tablenotes}
%\end{threeparttable}
%}
%\end{center}}}%
%BeginExpansion
\begin{center}
{
\begin{threeparttable}
[htbp]\centering
\caption{Examples of downstream access in network industries
\label{tab:pregex}}
\vspace{3mm}
\begin{tabular}{l l}\hline

Country &	Postal service regulation (2007, DE: 2008) \\\hline
Canada &	Price cap or single price approval, basic letter rate  \\
& rate and single piece mail, notification in advance, \\
& multi-year pricing plan approval \\
Germany &	Price cap for SMP operators with ex ante approvals  \\
& of single prices, bulk mail above 50 items/mailing \\
& excluded, efficient-cost-concept \\
Netherlands &	Price cap with two baskets (all products and \\
& small users), uniformity obligations \\
Sweden &	Cost orientation and uniformity required, only \\
& domestic letter rate regulated, otherwise free to \\
& set prices if compliant with competition rules \\
United States &	Price caps and floors, increases limited by CPI,  \\
& notification in advance, ban on below-cost pricing \\\hline
\end{tabular}
\begin{tablenotes}\footnotesize 
\item[1] Source: IPC Regulatory Database..
\end{tablenotes}
\end{threeparttable}
}
\end{center}%
%EndExpansion

Facing the fact, that the by far largest share of letter post items (EU
wide) is sent by businesses and organizations rather than individuals; the
business to consumer (B2C) segment of the letter post now accounts for 62\%
of total volume.\footnote{%
See EU (2006), p. 56.} This market concentration on the sender side might
also limit prices because of their option to scale to replicate the postal
network.

With the ongoing liberalization process, tariff regulation usually only was
introduced for universal services and the legal monopoly of the reserved
area and the potential to withdraw stringent tariff regulation raises.
Accordingly, in the Netherlands, the regulatory focus shifted from the whole
postal market to small users and led to the introduction of a further price
cap basket to reduce the regulated market segment. In Germany, regulation
applies partly only up to 50 items per sending and in Sweden only the
domestic (single) letter rate is directly retail price regulated.

Safeguarding competition is likely to be achieved by ex post control based
on competition policy. For margin squeezes as in telecommunications, the
dominant operator must be \textit{i)} vertically integrated, \textit{ii)}
the input must be essential, and \textit{iii)} the input must constitute a
relatively high proportion of the downstream/total cost. For such a margin
squeeze being judged anti-competitive, it depends furthermore on \textit{iv) 
}the imputation results and the definitions of \textit{\textquotedblleft
reasonably efficient service provider\textquotedblright } and \textit{%
\textquotedblleft normal profit\textquotedblright }, on the possibility of 
\textit{v)} an efficiency defense providing a reason other than strategic
anti-competitive behavior, e.g., achieving critical masses through
introductory offers, and \textit{vi)} harmful effects on consumers and
substantial negative effect on competition have to be proven. Due to the low
entry barriers to postal markets, also predatory pricing becomes unlikely,
because the short-run losses from such strategies are unlikely to be
compensated in the future. Therefore, ex post price control based on
competition policy should be sufficient.\footnote{%
Cf. Panzar (2008), p. 19.}

\section{Conclusion}

Assessing the regulation of telecommunications markets from the postal
sector perspective, the main conclusion is that regulation of postal markets
should not follow the regulatory policies used for telecommunications
markets.\footnote{%
Cf. also the conclusions of Baake and Wey (2007a).} Even if the idea of just
regulating bottlenecks seems appealing and to lead to rather straightforward
regulatory regimes, more complex regimes with high information requirements
are needed to achieve efficient outcomes.

Postal service markets have much more in common with standard markets such
as retailing, where sector-specific regulations are absent. Underestimating
the differences between postal service markets and telecommunications
markets concerning contestability or the technological features of the
underlying network may very well lead to distortions and suboptimal market
performance when the toll set used in telecommunications markets is
imprudently applied to postal services.

The markets are highly contestable due to the differences in the network
characteristics which allow for competition. The experience from access and
price regulation of telecommunications industries is problematic: Access
regulation and wholesale obligations distort investment decisions and spur
service based competition. In the longer run, this might lead to
inefficiencies from the lack of investment into innovations and concerning
intermodal competition.

Especially in the most open markets, dynamic reform processes have resulted
not only in greater efficiency of postal operators but also in a market
which focuses more and more on the interests of the customers.\footnote{%
Cf. EU (2006), p. 57.}

Reorganization, consolidation and diversification are continuing, and low
cost business models are developing. Overall, service quality and
performance increased. From a consumer perspective, all this has increased
the ability of Europe's postal operators to meet customer needs and thus has
a positive effect on universal service.\footnote{%
See EU (2006), p. 57.} Analyses of market shares of competitors as well as
the subjective perception of key players confirm that in cases where the
monopoly has been completely abolished or substantially reduced, real
competition is emerging.

Generally, in the postal industry there are neither non-transitory entry
barriers of structural or (with the abolishment of the reserved area) legal
nature, nor does the market do not tend towards effective competition over
time. In addition, most problems can be addressed sufficiently by
competition law alone. Hence, there is only limited scope for regulation,
and regulation should focus on competitive bottlenecks with proportionate
remedies applied in a punctual fashion. If structural bottlenecks are
symmetric, regulation should prefer market-based negotiation outcomes to
symmetric rules, which allow for end-to-end competition on a level playing
field.