SERVICE QUALITY, COMPETITION, AND REGULATORY POLICIES IN THE POSTAL SECTOR

This paper presents a simple model which illustrates the possible poli cy- and welfare-implications of endogenous product selection in the po stal sector. The cost of a unit of mail depends on its ''quality'' (e. g., speed of delivery) and on the type and location of the addressee ( firms, urban households, and rural households). Senders have inelastic demands and differ in their willingness to pay for quality. Addressee s are passive but their utility may affect social welfare. Two operato rs play a two-stage game, first choosing qualities and then prices. We first show that the equilibrium with two private (profit maximizing) operators results in an inefficient provision of quality. Then, we con sider the mixed (Nash) equilibrium with one private and one (welfare m aximizing) public operator. If the budget constraint of the public fir m is not binding, this equilibrium is shown to be first-best efficient even if social welfare accounts for the utility of addressees. If the budget constraint is binding, the mixed equilibrium is not efficient but yields a higher level of welfare than the private equilibrium. Fin ally, we study the impact of minimum quality standards within our sett ing.