EFFICIENT ENTRY, MONOPOLY, AND THE UNIVERSAL SERVICE OBLIGATION IN POSTAL SERVICE

This paper analyzes the nature of and justification for the Universal Service Obligation (USO) and its relationship to the Reserved Area for Postal Service. This is motivated by problems of funding the USO in t he face of increasing competition in the postal sector. After reviewin g various approaches to defining and funding the USO, we develop a mod el to consider the optimal scope of both the Reserved Area and the USO . The model assumes an incumbent postal provider and potential entrant s. The incumbent is guaranteed a monopoly franchise for services in it s Reserved Area R and offers services in a possibly larger set of serv ices U at uniform prices. All services not in R face competition from entrants. We characterize the welfare-optimal scope of R and U subject to a breakeven constraint for the incumbent. implications for USO pol icy are discussed in light of the results of the analysis.