The Effect of Flexible Pricing on Entry into the U.S. Letter Market

Abstract

This paper investigates the hypothesis that if the incumbent were given the freedom to adjust its prices for contestable mail, an entrant would be able to capture only a very limited amount of mail and the monopoly would be shown to have little value. It examines the effect of flexible pricing on efficient and inefficient entry into the U.S. letter delivery market. The entrant’s frequency of delivery and the amount of contestable mail in the market appear to be the most important variables (that we have modeled) in determining the success of the entrant. Consequently, the paper develops the sensitivity of the incumbent’s loss of profits to both variables.