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.