On setting prices and testing Cross-Subsidy with accounting data

Regulators are often faced with the challenge of both setting efficient pri ces and avoiding cross subsidy. Successful implementation of these goals re quires estimates of both marginal costs and incremental costs. We present a methodology for estimating both marginal and incremental costs for postal products. The proposed algorithms combine micro-unit accounting data and ec onometric estimation of the cost structure. We apply the methodology to the U.S. Postal Service and produce estimates of marginal and incremental cost s for eighteen postal products and incremental costs for another four group s of products.