Regulatory Institutions and Governance Costs

Abstract

In recent decades, the European postal industry has undergone profound reforms, which aim to promote competition while simultaneously maintaining a high level of universal services for consumers. It is often put forth that market opening and the emergence of competition will foster innovation in the postal sector. Indeed, increased direct competition with new market entrants and indirect competition with information technologies in the sector represent great challenges to the traditional business model of postal operators. In order to allow postal operators to cope with these challenges, regulatory institutions need to evolve coherently with developments in the market place and the society. One of the findings of this thesis is that in many cases, current regulatory institutions do not respond adequately and in a timely manner to changes in consumer preferences or technologies. The actual development in the British postal sector clearly demonstrates how the regulatory regime failed to adapt early enough and how the delay in the adaption of the regulatory institutions influenced the development of competition as well as the structure of the market. The main theoretical contribution of this thesis is the development of a framework of regulatory governance costs. The framework contains three different types of costs: staticdirect costs, static-indirect costs and dynamic costs. The static-direct costs of regulatory governance refer to the interaction and transactions between the involved actors in the short term, and only marginally concern the overall market. These costs are: - Monitoring Costs which arise on the regulatory institution’s side because of informational asymmetry in the relationships of principals with their agents. - Compliance Costs which are the costs that the industry faces in order to comply with regulatory requirements. - Coordination Costs which result from the fact that multiple actors are involved in regulation, which in turn have to be coordinated. The second type of regulatory governance costs, the static-indirect costs, pertains less to the individual actors than to the overall market. In addition to reducing security on investment in the short term, static-indirect regulatory governance costs are the costs related to: - Quantities and Prices: Actions of regulators (or policy makers) that have effects on the regulated industries and the consumers in terms of supply, demand the development of prices. - Capacity and Technology Choice: Regulation may prevent the regulated operators from aligning their supply with the effective demand and affect production technology. The third type of costs, the dynamic costs of regulatory governance, results in an inefficient level of product and process innovation. These costs occur mainly in combination with regulatory uncertainty ending in legal disputes or too rigid regulatory regimes that hinder the developments of markets. The dynamic costs reduce investment security in the long-term and encompass a more dynamic perspective than the static costs. The costs concern: - Product Innovation: regulation may prevent operators from introducing new products/services because excessive investment cost or limited gains from investment. It may also or result in a delay of time to market. - Process Innovation: regulation may result in suboptimal processes and prevent operators from optimizing existing processes or introduce process innovations. In summary, our approach to the appreciation of regulatory governance costs contributes to a better understanding of the consequences of regulation and the role of regulation regarding the development of markets. The insights about the costs and their impact on market evolution will be useful to analyze in the development of regulatory policies in the postal sector as well as in the network industries. The framework of regulatory governance costs is applied in three case studies in the postal market (Switzerland, Germany, Great Britain). The analysis of the cases provides insights into the impact of different institutional dimensions of the governance costs and the need for action in adapting current regulation. As a result, a set of policy recommendations is formulated in the conclusion.