Article at a glance:

Coping with competition in European postal markets

• When state-owned monopolies face market liberalization, they may well encounter a trade-off long familiar in competitive markets: to what extent should they lower their prices to gain market share or maintain those prices to protect margins?
• That was the problem facing a European postal service whose competitors were eating into its lucrative urban-mail-delivery business.
• Even though the incumbent enjoyed scale advantages, it couldn't dislodge the competition on price. The option of charging different prices for urban and rural customers wasn't a good one, because higher prices in rural markets would make them attractive to the new players.
• The incumbent modeled its cost to serve customers and in this way learned where it could cut costs and improve service to take advantage of its wide geographic coverage.