The Packets and Parcels Market Study

Stephen GibsonSLG Economics Ltd

www.SLG-Economics.co.uk

What is a Market Study? A structured definition of the different economic markets in

the postal sector◦ Retail markets: those serving a final customer (businesses or individuals)

◦ Wholesale markets: those providing intermediary products necessary to offer a retail service (e.g. access to Royal Mail’s delivery network)

Use a standard ‘hypothetical monopolist’ approach to market definition ◦ “Is there sufficient demand and supply side substitution to prevent

a monopolist from profitably raising prices 5-10% above the competitive level?”

An assessment of whether Royal Mail has market power in those markets or whether there is effective competition◦ What are the constraints on RM’s market behaviour including supply-side

and demand-side competition?

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Why do we need a market study? Good regulatory practice: Ofcom, OFT, ORR and Ofwat

use market studies to support their regulatory proposals Allows us to assess the need for regulatory intervention It gives stakeholders more information about how we

view the postal market and how this has informed policy proposals

To facilitate quicker investigations in future Hooper Review recommended that a market study was

undertaken Government endorsed the need for market study

However the market study is not an end in itself It provides part of the evidence for Postcomm to regulate

or deregulate in different markets as appropriate

Evidence gathering Early 2009: Customer and operator interviews July 2009: Discussion paper published Sept 2009: Stakeholder workshop Dec 2009: Questionnaires to operators Dec 2009 – Feb 2010: structured interviews with 90 customers and

19 operators (bi-weekly meetings with Royal Mail) Jan 2010: Questionnaires to express operators March 2010: Royal Mail position paper and follow up questions to

customers and operators Reports from: Accent Rand, Oxera, Royal Mail, Frontier Economics,

ONS, Triangle, Investec, Mintel, Verdict, Postwatch, Datamonitor, IMRG and ECORYS

May 2010: Detailed consultation paper (www.psc.gov.uk)

PPS Definition – scope of analysisPacket and Parcel services (PPS) defined as

all packets and parcels weighing up to 32kg and all Letters and Larger Letters which are not subject to the licensing requirements but excluding those Letters and Large Letters conveyed by vanilla services.◦ A licence is only required to convey letters which

cost less than £1 or which weigh less than 350g.◦ Vanilla services are services with no value added

attributes such as tracking and proof of delivery.

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Product dimensions

Price

Speed of

delivery

Customer type

Volume

Weight

Value added

Format

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Customer segmentation

PPS market split into:◦ C2X: Items sent by customers from their premises

Very small (but growing), no Royal Mail presence May be in same market as Y2X (demand-side substitution)

◦ Y2X: Items sent by customers and small businesses from collection points (Post Offices, pillar boxes, retail outlets) Royal Mail has market power

◦ B2X: Items sent from business premises B2C and B2B distinction increasingly blurred as operators

able to serve both types of customers Further segmentation required to assess the competitive

conditions

Customer segmentation

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Speed of delivery

Segmented into Express and Deferred markets◦ Operational models different and switching difficult◦ Large price and quality differences

Express (time-guaranteed) ◦ Guaranteed same day or next day delivery◦ Segmented into same day and next day markets◦ Highly competitive, no market power (irrespective of

further segmentation)

Deferred◦ Not time-guaranteed services, next-day or later

(including First Class)◦ Further segmentation to assess market power

Additional segmentation by speed of delivery

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Weight and volume Weight is important.

◦ RM currently price by weight steps and believes it to be an important dimension for determining how the market functions.

◦ Customers actively manage their choice of operator by weight of consignment.

◦ Competition increases with weight.◦ For low weights the operational differences drive different

competitive conditions.

Volume is important◦ Contract volume influences the degree of competitive choice

(depending on weight).◦ Higher volume customers have more incentive to shop around

and are able to multi-source.

Competitive choice a function of weight and volume

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Weight/ volumes Evidence suggests that we should consider weight and

volume jointly:◦ Below 1kg there is only limited competition for very high volumes

(above 500,000 pa)

◦ For 1-2kg there is competition for contracts above 50,000 pa

◦ Above 2kg there is competition for all items irrespective of volume

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Weight

Contract Volume

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Increasing

competition

Breakpoints Above 2kg end-to-end operators and Royal Mail have

similar cost structures . There was broad agreement that the market what competitive above 2kg.

Up to 2kg evidence suggested greater competition for heavier weights and volumes,

The evidence did not allow us to conclude on one unique weight or volume break point at which the conditions of competition changed significantly.

Defined one broad market up to 2kg (Light weight), and considered the different levels of competition in our market power assessment.

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Additional segmentation by weight

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Market Power in the deferred B2X <2kg marketThe ability of end-to-end operators to compete

with Royal Mail depends on their cost structure and whether the service can be bundled with more expensive services.

Collection costs determine the extent to which operators can compete for low volume contracts.

Delivery costs determine the extent to which operators can compete for low weight items.

The greater the volume of higher weight items sent with an operator the lower the price offered for light weight services.

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Market power assessment

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Premium/ ‘vanilla’Evidence suggests there is switching between

‘vanilla’ and premium based on price◦ If customers want a premium service the choice is

limited to premium suppliers, but◦ If customers want a ‘vanilla’ service they will switch

to a premium service if it is priced competitively to ‘vanilla’

◦ Asymmetric marketBecause we are concerned with RM market

power, we start the analysis from ‘vanilla’ which suggests a wider market – so we do not include this segmentation

PPS geographical and non-postal marketsDefine the geographic market as a national

(UK) market:◦Current operators’ coverage ◦Uniform pricing constraint ◦Case law precedent.

Non postal channels (e.g. retail outlets, online delivery, self-supply, etc.) do not provide sufficient competitive constraint on the PPS market to justify a wider market definition (Frontier report)

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The Packets and Parcels (PPS) Market Study Conclusions

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Regulatory proposals

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• C7 Requirement for advance notification and

publication of tariff changes

• C7- Requirement for notification of tariff changes

(more limited publication)

• C11 Promotion of effective competition

• C15 Accounting separation

• C21 Price Control

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Any questions?

Thank You

Stephen@SLG-Economics.co.uk