Global Coordination vs Unilateralism

For historical reasons, most postal operators are only active in their national markets, and they must cooperate to deliver cross-border. In practice, postal operators typically cooperate in the following way:

• The first-mile operator in the country of origin hands over the cross-border item to the last-mile operator in the country of destination who delivers the item;
• The postal operator in the country of origin charges the sender for the full end-to-end delivery, and
• The postal operator in the country of origin pays the operator in the country of destination for granting use of its delivery network.

The Universal Postal Union (UPU) system of terminal dues governs payments for the sorting and delivery of cross-border letter post items. A global multilateral system, such as the UPU, has to achieve two objectives:

• Maximise the total welfare gained from the international activities through efficient cooperation (grow the pie).
• Ensure a fair allocation of benefits between participants, so that all members benefit from cooperating (share the pie).

This study focuses on understanding the drivers that underpin the economic welfare contribution of a global multilateral system, such as the UPU terminal dues remuneration. In doing so, it considers, based on several strands of economic theory, the likely effects of abandoning this type of system in favour of unilateral action.

The main conclusions of our study are:

• Multilateral agreements serve a fundamental purpose of ensuring coordination as an alternative to complex webs of contractual agreements, which would carry costs and inefficiencies.
• Several branches of economic theory have analysed the conditions for multilateral arrangements to yield a better global social welfare outcome than a scenario led only by unilateral action and bilateral agreements.
• Contract theory identifies several conditions (complexity, long-term nature of interactions, etc) under which governance structures can limit transaction costs and lead to better overall outcomes than direct negotiations.
• Game theory identifies a double-marginalisation problem leading to excessive price and insufficient quality in bilateral price setting where there is market power; besides, bilateral negotiations outcomes depend on outside options available, which diverge significantly globally.
• International trade economics finds that – absent multilateral coordination – “spaghetti bowl” and “hub&spoke” effects, together with high costs of negotiating FDAs, lead to trade diversion effects detrimental to global welfare.
• Digital substitution of addressed mail implies that the postal industry has to face up to a “survival” challenge, while delivery of e-commerce products such as small packets is a key opportunity.

The study is commissioned by Le Groupe La Poste.