Market structure

Entry

City Mail started its business in central Stockholm already in 1991, two years before liberalisation. It went bankrupt twice, in 1992 and again in 1995 after first being bought by

44 In Sweden, usually public enterprises are given a goal for the yield to the state for some kind of “normal”

profit. It is a kind of rate of return regulation, but in many cases it serves as a desired maximum target because the businesses are making losses. In recent years, some state owned companies, particularly the one in the electricity sector have made large profits. The regulation of the goal for state owned companies is often vague, which was discussed in the previous chapter.

45 There are also transaction costs if prices are too complex. It was the simple idea of Sir Rowland Hill already in 1840 to replace a distance-based postage with a uniform postage. But he advocated two prices: one for local and one for national mail (Crew & Kleindorfer 1991). Every mail item is unique, but there cannot be a unique price for each letter. In finding the optimal balance between simplicity with low transaction costs and prices geared to costs, the price structure in many non-liberalised countries has become too uniform.

Sweden Post. It restarted business in January 1996 with new capital and has increased volumes and improved its profitability since. However, the company made losses in each of the first ten years, turning profitable for the first time in 2005. Today it delivers to almost 40

% of Swedish addressees and has a market share of 12 % of the national bulk mail market, which is around 30 % of the market in the area it operates. The second largest new operator has been SDR. The company mainly delivers unaddressed advertisements, mostly on weekends using low-cost labour. As a side activity it also delivers some addressed items.

In the first years, a couple of small local operators started business. In late 1996 and 1997, a wave of new such operators emerged. It was a combination of high unemployment, price increases by Sweden Post and widespread information about new competitors to Sweden Post that led to further establishments. Their business idea has been to deliver local mail, often within a small town with a limited rural environment. Customers are mainly local businesses and public authorities, but many of them also sell stamps and have street boxes to generate mail from households. The local mail market is estimated to be 15 % of all mail. Some new operators are firms with other delivery activities like morning newspapers, express mail and parcels. Most of the successful firms, however, have focused only on mail delivery. It appears that the economies of scope between delivery of mail and other items in this local market are very limited. Some operators in adjacent cities have attempted to create a network with exchange of mail in order to establish regional networks. Such attempts have usually failed because of organisational and financial difficulties. The firms are so small that any extra arrangements are costly and when mail flows are uneven, a system for dividing revenues must be created.⁴⁶

Figure 5.1 shows the number of postal operators with a licence from PTS and the estimated number of active firms each year since 1995. A number of licence holders never actually started business. Some firms have overestimated the business opportunities, others may hold on to the licence in order to scarce off other potential newcomers if they eventually will start business.

Figure 5.1: Number of licensees and active postal firms 1993-2005

Number of licencees and operators

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200 3

Note: The number of licences is measured by end-of-year and number of operators during the year. Thus, the number of operators can exceed the number of licence holders.

Entry occurred in two segments: bulk mail from the whole of Sweden to the most populated areas (City Mail, SDR) and local mail within some small towns. The number of new firms exceeded the expectations in 1993; the Government Commission anticipated only a “handful”

new companies. There has been a substantial reduction in the number of local operators, from around 100 down to a stable number of around 30 and volumes of the local operators are nearly half of the peak in 1998. The reason is not only lack of profitability. Another explanation is the vulnerability of very small firms. Unexpected demand fluctuations, losses of an important client and inability to combine mail delivery with other business are other explanations. Such a simple thing as to carry on business becomes impossible if the single owner, who is the only person to know the delivery routes, becomes ill. Before the

amendment of the Postal Act in 1999, there were also problems with access to Sweden Post’s post office boxes that made business more difficult.

Over time, Sweden Post has gradually lost market share to City Mail while the local operators keep a very small fracture of the market. The loss of volume in the market for addressed items is currently at least as important for Sweden Post as the loss of market share. Its current volume has returned to the level of around 1990.

Table 5.1: Volumes (million addressed items) and market shares 1996-2005

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Sweden

Source: www.pts.se. Volume statistics are missing for other operators before 1996.

Two questions remain. First, why do the local operators with prices 25-40% lower than Sweden Post not win the entire local market? Explanations are lack of trust in new operators as well as insufficient marketing from the new entrants and costs for dividing the local mail from the rest. Large firms also might get larger discounts if they give large contracts to a single market player, which can then only be Sweden Post or sometimes also City Mail.⁴⁷ The second open question is why entry ceased since 2001. Around 30 small local firms have indeed been successful and are profitable. Rational entrepreneurs in other locations would probably be able to enter successfully, particularly when there are other operators to learn from. The conditions for starting business are in fact somewhat better now than in 1997 when access to the postal infrastructure started to be regulated. If postal consumers are rational, there must be high switching costs or a risk premium for choosing alternative providers, or they do have insufficient information about the alternatives. Considering the publicity new operators obtain, the latter explanation is not likely.

47 Andersson (2000).

However, counting the total number of operators in the country gives an incomplete picture of the market structure. If one studies the number of deliverers in a certain place, there are only two firms (Sweden Post and City Mail) for 40 % of the addressees, Sweden Post and a local firm for around 1 % and only Sweden Post for the rest of the country. Even with a few more hundred local operators, Sweden Post would be the only firm in most places. The postal market has followed the typical path for liberalised markets with a short upraise in the number of firms.

Vertical integration

The previous section dealt with horizontal (dis-)integration; entry has occurred, but Sweden Post maintains over 90 % of the total market. A lot more has happened in the vertical production chain. Most of the bulk mail today is pre-sorted, which means that senders of mail take over upstream production and enter downstream, letting the postal operators deliver. So, the natural monopoly hypothesis does not uphold for upstream production for pre-sorted mail.

The development of this market was spurred by liberalisation. A pre-condition is the advances in technology. Postal monopolists in some non-liberalised countries partly also allow downstream and upstream entry. In the USA, worksharing in the form of preparing the mail before bringing it to the postal operator started over 50 years ago and later discounts for preparing and pre-sorting were offered. In many other countries, on the other hand, down- and upstream entry is currently not possible.

When City Mail entered in 1991, Sweden Post did not have a discount for pre-sorted mail.

City Mail offered a new and innovative product. Thus, liberalisation stimulated efficiency by introducing pre-sorting in Sweden earlier than otherwise. Hence, prices for pre-sorted mail were lowered earlier thanks to liberalisation. And liberalisation might also have been the trigger for creating the idea.

Furthermore, Sweden Post has outsourced some of its activities, particularly in the transportation stage, which is subject to procurement. This further contributes to the vertical disintegration in the industry. A modern management of a state monopolist would have acted in the same way, but liberalisation and competitive pressure may have contributed to using this efficiency-enhancing potential earlier. Sweden Post has also responded to competition by entering into other firms’ internal mail departments. It offers services to take over internal mail functions with its experience from the postal sector. It has also in 2006 bought the largest upstream firm, Strålfors, which prints and envelopes pre-sorted bulk mail.

Thus, the industry is subject to vertical disintegration. This change may have been stimulated to take place earlier and also prices were probably lowered to a larger extent than without liberalisation. However, the current difference to many other non-liberalised countries is large, even if such worksharing discounts exist in a few of them. Whether Sweden Post would have introduced lower prices for pre-sorted mail without market opening is impossible to know. Considering the radical changes in prices and productivity to be described below, the effect is clearly stronger and occurred earlier than it would have without deregulation.