Competing with Mr. Postman : Business Strategies, Industry Structure and Competitive Prices in Liberalized Letter Markets

Letter markets are still highly regulated in many countries. The European Commission, however, plans to liberalize letter markets in all member states within this decade. We describe the economic characteristics of letter markets, identify four likely regulatory scenarios, and analyze business models and entry strategies for new competitors. In particular, we predict which segments of a liberalized letter markets will be targeted by new competitors and how the incumbent will react. In order to derive our predictions, we construct a gametheoretic model for all relevant segments and regions of the German letter market. For each of the four scenarios we compute equilibrium prices, market shares, and profits for the incumbent and all entrants. Although we calibrate our model with German data our results are quite general and should apply to other countries with similar characteristics such as France, Japan, and the U.K