Pricing behaviour of postal operators and its effect on ... · PDF fileInterim results...
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European Commission, DGMARKT
26 June 2012
Pricing behaviour of postal operators and its effect on postal markets
Pricing behaviour of postal operators
and its effect on postal markets
Agenda
2
● The process
o Content of the study
o Activities
● Interim results – Drivers behind pricing strategies
o A general pricing model
o Supply side drivers
o Demand side drivers
o Assessing welfare effect of pricing strategies
o Regulatory drivers
● The next steps
o Work ahead
Pricing behaviour of postal operators
and its effect on postal markets
Content of the study
3
The process
Regulation
Pricing behaviour of postal operators
and its effect on postal markets
Activities
4
The process
Activity 1: Main
developments in pricing and
regulation
Activity 2:Analysis of
developments
Activity 3:
Conclusions
and
recommen-
dations
Pricing behaviour of postal operators
and its effect on postal markets
Activities – Main developments in pricing and regulation
5
● January – May: Data collection
o Pricing
o Regulation
o Competition cases
● Workshops held with selected stakeholders in Copenhagen
o 27 January with NRAs and NCAs
o 2 February with incumbents
o 3 February with new operators
● In addition, interaction with
o FEDMA
o PostEurop
o Consumer Focus
The process
Pricing behaviour of postal operators
and its effect on postal markets
Activities – Main developments in pricing and regulation
6
Most important concerns related to pricing
● Outcome of stakeholder workshops:
The process
Source: Stakeholder workshops
Incumbents
- Price caps and
controls
- Regulatory
uncertainty
Challengers
- Lack of
transparency
- Selective pricing
- Leverage effects
NRAs/NCAs
- Information
asymmetries
- Unclear
definitions
(e.g. cost-
orientation)
Pricing behaviour of postal operators
and its effect on postal markets
Activities – Main developments in pricing and regulation
Questionnaire receipts, 13th June
Source: CE
● End of March: Questionnaires sent out
o NRAs: prices, volumes, regulation and
competition cases
o NPOs: prices and volumes
o NCAs: competition cases
● By early June, we received the following
replies
o 26 NRAs
o 21 USPs
o 22 NCAs
●Thank you for your replies!
The process
NRA NPO NCA
1Austria x
2Belgium x x x
3Bulgaria x
4Cyprus x x
5Czech Republic x x
6Denmark x x
7Estonia x x
8Finland X x x
9France X x x
10Germany X x x
11Greece x
12Hungary x x x
13Ireland x x x
14Italy x x
15Latvia x x
16Lithuania x x x
17Luxembourg x x
18Malta x x
19Netherlands x x x
20Poland x x x
21Portugal x x x
22Romania x x x
23Slovakia x x x
24Slovenia x
25Spain x x expected
26Sweden x x
27United Kingdom x x x
28Iceland
29Liechtenstein
30Norway x x x
31Switzerland x x x
7
Pricing behaviour of postal operators
and its effect on postal markets
Activities
8
The process
Activity 1: Main
developments in pricing and
regulation
Activity 2:Analysis of
developments
Activity 3:
Conclusions
and
recommen-
dations
Based on the information
collected, we have started to
analyse the developments.
Next: Some interim results
Pricing behaviour of postal operators
and its effect on postal markets
Activities
9
The process
Observed development in
pricing and regulation
Analysis of price drivers
and effects on markets
and consumers
We start here
Pricing behaviour of postal operators
and its effect on postal markets
Agenda
10
● The process
o Content of the study
o Activities
● Interim results – Drivers behind pricing strategies
o A general pricing model
o Demand side drivers
o Supply side drivers
o Assessing welfare effects of pricing strategies
o Regulatory drivers
● The next steps
o Work ahead
Pricing behaviour of postal operators
and its effect on postal markets
A general pricing model
11
● Prices set to maximize profits
o Two counteractive effects of price changes
o Operator increases prices as long as A>B
o Result 1: Prices to some extent cost-driven (high MC � high price)
o Result 2: Prices to large extent demand-driven (low elasticity � high price)
Interim results – Drivers of pricing strategies
P
Q
MC
Q1Q2
P2
P1
Increased profit
Reduced
demandB
A
Cost savings
Pricing behaviour of postal operators
and its effect on postal markets
A general pricing model
12
● Marginal cost and elasticity affected by drivers on the supply and
demand side of postal operations
● Additional price drivers: regulation and strategic goals
o Regulation may reduce pricing flexibility
o Long term strategies may result in short term losses with both positive and
negative welfare effects
● Our aim
o Test theoretical model against actual pricing behaviour
o Assess welfare effects of the applied pricing strategies
● 3 core questions
o Are pricing decisions driven by elasticities problematic?
o Are long term strategies affecting pricing decisions problematic?
o How should regulators cope with emerging problems?
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers
(limiting the pricing flexibility of operators)
o Price regulation
o VAT regulation
o Access regulation
A general pricing model
13
Interim results – Drivers of pricing strategies
Supply side drivers
(affecting marginal costs)
o The role of volume developments
o Cost structure of operators
o Operations and logistics
o Quality and frequency of delivery
o Geography
o Product features
Demand side drivers
(affecting elasticity of demand)
o Product value
o Technological development
o Competition
o Substitutability/complementarity of
products
o Traditions/public image of postal
operators
o Transparency and cost allocation requirements
o USO scope
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers
(limiting the pricing flexibility of operators)
o Price regulation
o VAT regulation
o Access regulation
A general pricing model
14
Interim results – Drivers of pricing strategies
Supply side drivers
(affecting marginal costs)
o The role of volume developments
o Cost structure of operators
o Operations and logistics
o Quality and frequency of delivery
o Geography
o Product features
Demand side drivers
(affecting elasticity of demand)
o Product value
o Technological development
o Competition
o Substitutability/complementarity of
products
o Traditions/public image of postal
operators
o Transparency and cost allocation requirements
o USO scope
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers - Introduction
15
● Supply side drivers affect marginal costs
● Our expectation
o Everything else equal, the model predicts…
… Low marginal cost � low price
… High marginal cost � high price
Interim results – Drivers of pricing strategies
P
Q
MC
Q1Q2
P2
P1
B
A
MC
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers – The role of volume developments
16
● General trend: Falling mail volumes
● Expected effect
o Falling mail volumes � higher MC � higher price
o Size of effect depend on how operators cope with higher MC
● Two ways of coping with higher MC
o Price increases
o Cost savings (cost structure, operations and logistics)
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers – Price increases and cost savings
17
Price development in MS with higher/lower volume declines
Price increases
o Higher MC transferred to end customers in terms of higher prices
o Allow operators to keep profits, but might not be viable due to substitution
Interim results – Drivers of pricing strategies
Note: Single piece letters 20g
Source: Eurostat, incumbent questionnaire
0,7
0,9
1,1
1,3
1,5
1,7
2004 2006 2008 2010 2012
2004=1
0,7
0,9
1,1
1,3
1,5
1,7
2004 2006 2008 2010 2012
2004=1High volume decline, <-10% Low volume decline, >-10%
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers – Price increases and cost savings
18
● Cost savings
o Increased efficiency and adaption of capacity to demand changes
o Allow operators to avoid price hikes due to higher MC
o E.g. introduction of more flexible working arrangements, new sorting equipment,
work-sharing, volume gathering strategies
● Example: Volume gathering strategies
o Higher volume per visit � lower cost per item
o E.g. introduction of new (non-time critical) products and new delivery models
o Closely connected to demand side consumer preferences
● Cases
o Netherlands: “Basic Mail”
o Denmark: “XY delivery model”
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers – Price increases and cost savings
Price differences D+1 vs. D+3, 2012
Note: PostNL: Bulk mail mixed 50g min 250 items; Post Denmark: mail 50g up to
25000 items per 3 months
Source: PostNL (2012), Post Denmark (2012)
Interim results – Drivers of pricing strategies
0
20
40
60
80
100
D+1 D+3 D+1 D+3
PostNL Post Denmark
Euro cent
● Need for price incentives and flexible regulation?
o Price difference between alternative products (e.g. D+1 and D+3)
o Does price regulation make volume gathering strategies difficult?
19
Pricing behaviour of postal operators
and its effect on postal markets
Supply side drivers – Price increases and cost savings
Price development, Denmark 2001-2011
Source: Incumbent questionnaire
Interim results – Drivers of pricing strategies
● Introduction of XY delivery in Denmark in 2008
o Increased price differences between D+1 and D+3 letters
o Increased incentive for substitution to D+3
3
4
5
6
7
8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
DKK
Denmark D+1 Denmark D+3
20
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers
(limiting the pricing flexibility of operators)
o Price regulation
o VAT regulation
o Access regulation
A general pricing model
21
Interim results – Drivers of pricing strategies
Supply side drivers
(affecting marginal costs)
o The role of volume developments
o Cost structure of operators
o Operations and logistics
o Quality and frequency of delivery
o Geography
o Product features
Demand side drivers
(affecting elasticity of demand)
o Product value
o Technological development
o Competition
o Substitutability/complementarity of
products
o Traditions/public image of postal
operators
o Transparency and cost allocation requirements
o USO scope
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers - Introduction
22
● Demand side drivers affect elasticity of demand
● Our expectation: Price discrimination
o Price differences not corresponding to differences in underlying costs
o Everything else equal, the model predicts…
… High elasticity (frequent users with substitution possibilities) � low price
… Low elasticity (infrequent users without alternatives) � high price
Interim results – Drivers of pricing strategies
P
Q
MC
Q1Q2
P2
P1
High elasticity:Small price hike
generate large
volume loss
Low elasticity:Same price hike
generate larger
increase in profit
� incentives to
raise prices
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers – Technological development
23
● Expected effect on pricing
o E-substitution � higher market elasticity of demand (more substitution
possibilities) � lower price
o Also effect on MC on supply side
● Earlier studies (Robinson (2007), Veruete-McKay et al (2010) etc.)
o Highest degree of e-substitution for B2C direct marketing and C2C letters
o Generally: Limited e-substitution for B2C transactional mail
● Our expectation
o Price of DM < price of transactional mail
● Our findings
o DM priced lower than bulk mail
o Prices for DM grow more slowly than prices for bulk mail
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
0,6
0,7
0,8
0,9
1
1,1
1,2
2004 2006 2008 2010 2012
Demand side drivers – Technological development
24
Price development 2004-12
Source: Responses to questionnaire from NRAs and incumbents
Interim results – Drivers of pricing strategies
Bulk mail
Direct mail
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers - Competition
25
● Expected effect on pricing
o Competition �higher firm elasticity of demand (some mailers can
switch) � lower price
o No improvement for captive users (e.g. individual C2X senders)
● Earlier studies (e.g. Crew and Kleindorfer 2011)
o Competition driving factor behind postal operators’ pricing strategies
o No competition: no strategic customer orientation in pricing
o Competition: price discrimination, market analysis, application of price
models
● Our expectation
o Competition promotes lower prices
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers - Competition
26
● Our findings
o Actual competition � lower prices
o Sweden: Prices of large consignments of pre-sorted mail dropped by 40%
during the first 8 years with competition. At the same time, the price of smaller
consignments of unsorted mail increased by 92%. No sign of predation
o However, competition do not always promote lower prices
Interim results – Drivers of pricing strategies
4,80
2,60 2,90
5,00
8,00
9,60
0
2
4
6
8
10
1991 2001 2009
kr/st
Large consignments, pre-sorted
Small consignments, unsorted
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers – Competition
27
● Two types of competition: upstream vs. E2E
● Lower prices in the long run
…if customers served by the most efficient operator
● Higher prices in the long run
… if inefficient operators are kept in the market
… if efficient operators squeezed out from the market
● Problems
o Margin squeeze, loyalty rebates and discriminatory
pricing (e.g. anti-competitive zonal pricing)
● To prevent higher prices in the long run
o Check for cost-orientation at different dimensions
Upstream competition
End-to-end competition
Interim results – Drivers of pricing strategies
sorting
delivery
delivery
sorting
margin
squeeze
loyalty rebates
discriminatory
pricing
II
E
I I E
Pricing behaviour of postal operators
and its effect on postal markets
Assessing welfare effects of pricing strategies
28
● Until now: Focus on supply and demand side drivers
o Pricing decisions affected by MC and elasticities
o In addition: Long term strategies
● Next: The role of regulation
o Need for intervention if existing drivers create unfavourable
outcomes
● Framework for analysis
o Welfare economics
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Assessing welfare effects of pricing strategies
29
● Existence of supply side drivers � cost-driven price changes
● Generally considered OK
● Volume gathering strategies may increase total welfare, if…
… creating a wider selection of accessible products for consumers
… increasing total volume and higher economies of scale
● However, total welfare may decrease, if …
… pricing is part of an anti-competitive strategy (e.g. selective rebates, predatory
pricing, zone pricing, or leverage effects)
… regulation prevents postal operators from introducing new products
o Concerns raised by incumbents and alternative postal operators
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Assessing welfare effects of pricing strategies
30
● Existence of demand side drivers � lack of cost orientation
o Optimal pricing strategy does not fully reflect differences in underlying costs (MC)
o Result: Might lead to price discrimination between high and low elasticity senders
● Differing opinions on whether this is OK or not
o Both from legal and economic point of view
● Again, effect on welfare is ambiguous
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
PS=7
● Price discrimination may increase total
welfare if…
… increasing the accessibility to products for users
with lower willingness to pay
Assessing welfare effects of pricing strategies
31
Interim results – Drivers of pricing strategies
Example:
Total market size: 2 units
2 consumer types: L and H
Willingness to pay: 5 vs. 10
Constant MC: 3
Uniform price
Price discrimination
Price 10 5 and 10
Users served H only L and H
Producer surplus 7 9
Consumer surplus 0 0
Total welfare 7 9
3
Q
P
2
10
1
5
DWL=2
Pricing behaviour of postal operators
and its effect on postal markets
Assessing welfare effects of pricing strategies
Welfare maximizing vs. profit maximizing pricing
Source: Copenhagen Economics
Welfare maximisation(Ramsey pricing)
Profitmaximization
Price discrimination Yes Yes
Higher price for captive users
Yes Yes
Lower price for price-sensitive users
Yes Yes
Positive profits No Yes
Interim results – Drivers of pricing strategies
● Difference: Distribution and level of welfare
o Ramsey pricing (welfare maximisation): Profit zero after fixed costs are
covered.
o Monopolist: Maximization of profits without constraints.
● Higher prices than Ramsey prices
32
Pricing behaviour of postal operators
and its effect on postal markets
Assessing welfare effects of pricing strategies
33
● Price discrimination may decrease total welfare if …
● Implication: Need to assess the severity of welfare reductions
Interim results – Drivers of pricing strategies
Risk of unreasonably high profits
- Decreases with competition
- Decreases with falling mail volumes
Risk of efficiency impediments
- Decreases with competition
- Decreases if one single network (if
competition in some segments)
Risk of affordability problems
- Decreases with competition
- Decreases with the share of postal
products in household budget
Risk of anti-competitive strategies
- Has to be controlled by regulation
(competition law/sector regulation)
Risk of anti-competitive strategies
- Has to be controlled by regulation
(competition law/sector regulation)
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers - Competition
Common price-related abuses in the postal sector
Source: NCA questionnaires
Type of abuseNo. of cases
examined
Excessive Pricing 9
Discriminatory Pricing (incl. Rebates) 16
Predatory Pricing 5
Margin Squeeze 1
Loyalty Rebates 10
Tying 3
Customer-sharing Agreements 2
Other 5
Interim results – Drivers of pricing strategies
34
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers - Competition
Common market segments in postal sector cases
Source: NCA questionnaires
Market segmentNo. of cases
examined
Unaddressed Mail 9
Parcels 3
Mail Preparation 7
Press Distribution 6
Postal Money Orders 1
Addressed Direct Mail 5
Other 4
Interim results – Drivers of pricing strategies
35
Pricing behaviour of postal operators
and its effect on postal markets
Demand side drivers – Trends in NCA decision making
36
● Principles of the 2009 Guidance Paper v. CJEU Case Law on
Abuse of Dominant Position
o Further research: What practice do the NCAs follow?
● Cooperation with National Regulatory Authorities v.
Inconsistencies in Decisions taken by NRAs and NCAs
● Diverging Conclusions for Similar Factual Situations: the
Example of Mail Handlers Rebates
Interim results – Drivers of pricing strategies
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers
(limiting the pricing flexibility of operators)
o Price regulation
o VAT regulation
o Access regulation
A general pricing model
37
Interim results – Drivers of pricing strategies
Supply side drivers
(affecting marginal costs)
o The role of volume developments
o Cost structure of operators
o Operations and logistics
o Quality and frequency of delivery
o Geography
o Product features
Demand side drivers
(affecting elasticity of demand)
o Technological development
o Competition
o Substitutability/complementarity of
products
o Traditions/public image of postal
operators
o Transparency and cost allocation requirements
o USO scope
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers - Introduction
38
● Until now: Pricing strategies generate both welfare enhancing
and welfare reducing effects
● Way of coping with negative effects: Regulation
o Competition law
o Sector specific regulation
● Focus today: Cost orientation
Interim results – Drivers of pricing strategies
Welfare enhancing effects
- Wider product selection
- Lower prices
- Higher economies of scale
Welfare reducing effects
- Unreasonably high profits
- Lower X-efficiency
- Affordability problems
- Anti-competitive effects
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers – Cost orientation
39
● Cost-orientation to prevent anti-competitive
foreclosure
o E.g. margin squeeze, loyalty rebates and anti-
competitive zone pricing
o Emphasized by NRAs/NCAs in stakeholder workshops
● Relevant dimension depend on specific
situation
o Upstream competition: Cost-orientated pricing of
preparatory vs. last mile activities
o End-to-end competition: Cost-oriented pricing of
geographical areas
Upstream competition
End-to-end competition
Interim results – Drivers of pricing strategies
sorting
delivery
II
E
delivery
sorting
I I E
ProductA
Product B
Product C
Urbanarea
Ruralarea
Collection
Sorting
Transport
Sorting
Delivery
ProductA
Product B
Product C
Urbanarea
Ruralarea
Collection
Sorting
Transport
Sorting
Delivery
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers – Cost orientation
40
How is "cost-orientation" measured?
Note: In Cyprus, the NRA has only recently received cost
data for the first time and the approach is
undecided at the moment
Source: NRA questionnaire
● Our findings: Two problems with cost-
orientation
● Problem 1: Measurement level
o Often product-focus, not activity or geography
o Measurement at different levels of aggregation
● Consequence
o Hard (impossible) to verify if individual prices
are cost-oriented when cost orientation
applies on a basket of services
o Impossible to prevent margin squeeze, loyalty
rebates and anti-competitive zone prices if
cost-orientation apply at product level
Interim results – Drivers of pricing strategies
Answer No. Countries
Individual price point
6 EL, ES, IE, LT, LV, SE
Individual service 12CZ, EL, FI, FR, LT, LU, MT, PL, PT, RO, SI, SK
Basket of services
9AT, CZ, DE, EE, FR, HU, IT, NL, NO
Non - application 2 CH, CY
No answer 5 BG, DK, IS, LI, UK
Pricing behaviour of postal operators
and its effect on postal markets
Regulatory drivers – Cost orientation
41
Specific criteria defined?
Source: NRA questionnaire
● Problem 2: Lack of definition
o Often no national criteria interpreting the
meaning of “cost orientation” from the
Directive
o Moreover, defined criteria differ between
countries
● Consequence
o Regulatory uncertainty
o A cost-oriented price in one country may not
be considered cost-oriented in another
● In addition: Compliance costs
o Requirement to submit regulatory accounts,
not used by postal operators for internal
purposes
Interim results – Drivers of pricing strategies
Answer No. Countries
No specific criteria defined
18AT, BE, CH, EE, EL, ES, FR, HU, IT, LT, LU, LV, MT, PL, PT, SE, SI, SK
Specific criteria are present
7 CZ, DE, FI, IE, NL, NO, RO
No answer 6 BG, CY, DK, IS, LI, UK
31
Pricing behaviour of postal operators
and its effect on postal markets
Agenda
42
● The process
o Content of the study
o Activities
● Interim results – Drivers behind pricing strategies
o A general pricing model
o Demand side drivers
o Supply side drivers
o Assessing welfare effects of pricing strategies
o Regulatory drivers
● The next steps
o Work ahead
Pricing behaviour of postal operators
and its effect on postal markets
Work ahead
43
The next steps
Activity 1: Main
developments in pricing and
regulation
Activity 2:Analysis of
developments
Activity 3:
Conclusions
and
recommen-
dations
Pricing behaviour of postal operators
and its effect on postal markets
Work ahead
44
The next steps
Jun Jul Aug Sep Oct Nov
Activity 1. Identify development
Task 1A: Main developments in pricing
Task 1B: Main developments in the market
Task 1C: Main developments in regulation
Copenhagen workshops
Activity 2. Impact assessment
Task 2A: Impacts on postal operators
Task 2B: impacts on postal markets
Activity 3. Conclude and recommend
Task 3A: Areas of concern
Task 3B: Best practice regulation
Task 3C: Proposal for actions
Brussels workshops
Draft final Final
32
Pricing behaviour of postal operators
and its effect on postal markets
45
Thank you!
Henrik Ballebye Okholm: [email protected]
Marcin Winiarczyk: [email protected]
Anna Möller: [email protected]