Economic analysis of the Swedish price cap regulation in the postal sector

Is the current price cap on postal tariffs in Sweden a socio-economically efficient way to achieve regulatory goals?

Since 1998, postage rates for domestic single piece letters up to 500 grams in Sweden are subject to a price cap, allowing prices to increase by inflation on a yearly basis. As letter volumes are falling continuously due to increased use of electronic communication channels, unit costs for mail delivery are increasing more rapidly than the inflation based price cap. This development raises the question as to whether the current price cap is the most appropriate way to achieve the intended regulatory goals.

Against this background, we have analysed how well the current price cap regulation performs in terms of meeting regulatory goals and providing for socio-economic efficiency. We have also analysed how well alternative solutions could meet the same goals. The main conclusions of our study are:

• The current regulation can fulfil regulatory goals of ensuring reasonable prices for vulnerable users and counteracting anti-competitive cross-subsidisation.
• However, the current regulation goes beyond what is necessary to achieve these goals. It also fails to achieve regulatory goals related to cost-oriented prices, a financially sustainable provision of universal postal services, and a socioeconomically efficient provision of postal services.
• Alternative regulatory solutions could achieve regulatory goals and provide for an efficient provision of postal services at a much lower cost than the current price cap regulation. Notably, ex-post regulation of postage rates (in combination with existing competition law) would achieve all goals at a small regulatory burden, and a modified price cap regulation would also be a significant improvement compared to the current situation.

The study is commissioned by PostNord