Deregulation of Letter Markets and its Impact on Process and Product Innovation

Abstract

Anticipating the upcoming deregulation of letter markets, incumbents must decide on how much to invest in process and product innovations in order to be competitive once markets are deregulated. We analyze this decision process with a two stage model with price competition and product di¤erentiation. We distinguish between the regulatory scenarios of end-to-end competition and work sharing, and compare these scenarios with regards to the incumbent's innovation incentives. We …nd that the incumbent's incentives for process innovations in the upstream segment are stronger under end-to-end competition. Assuming that the entrant's demand under work sharing is higher than the decline in the incumbent's demand, the incumbent's incentives for downstream process innovations are stronger under work sharing. If the access price is higher than the …rms' average downstream costs, incentives for product innovations are stronger under work sharing.

Innovation in the Swiss mail sector: deregulation versus liberalization

“…In our considerations, product and process innovation complement each other, and a reduction in process innovation drags down product innovation as well. Our considerations are much in line with Dietl, Grütter, and Lutzenberger (2006) in that it is quantity demanded which primarily drives the incentives to innovate.…”

“…Also, Boone (2001) finds a non-monotone relation between intensity of competition and the incentives to innovate. Dietl, Felisberto, Finger, et al (2005); Dietl, Grütter, and Lutzenberger (2006) analyse the effect of regulation and deregulation of letter markets on process and product innovation under various regulatory scenarios.…”

Developing Universal Postal Services in Latin America An Economic Perspective

“…On the other side, competition might spur efficiency and innovation in the sector. For the effects of regulation on innovation see Dietl et al (2007Dietl et al ( , 2008aDietl et al ( , 2008b).…”

Competition and the social cost of regulation in the postal sector

“…Armstrong and Sappington (2006) give a detailed overview on the role of innovation in regulated industries in general whileDietl et al (2008) concentrate on innovation incentives for postal operators in particular.3 The discrepancy of antitrust regulation and competition is increasing in the postal sector where incumbents are often still considered dominant in mail even though they continue to lose market share to alternative means of communication.4 Dieke and Wojtek (2008) as well asHeitzler and Wey (2010) analyze the impact of the minimum wage discussion in the German Postal market in more detail.…”