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Abstract

Mail delivery is one of the few economic activities that has avoided the wave of deregulation and privatization that has swept network industries over the last few decades. This Article examines several questions regarding the business activities of Canada Post Corporation in a competitive environment. What should be the appropriate mandate of Canada Post? If Canada Post is a natural monopoly, what form of regulation best serves Canadian consumers? If Canada Post's delivery of letter mail is not a natural monopoly, what basis exists for retaining Canada Post's current statutory monopoly? What potential exists for Canada Post to abuse its statutory monopoly-and other statutory privileges and immunities-to compete unfairly against efficient private suppliers of postal services?

Part I of this Article outlines the regulatory and institutional setting in which Canada Post operates, including the nature and extent of Canada Post's legal monopoly. Part II demonstrates why technological justifications for the postal monopoly are no longer valid. Part III establishes that public provisions of the full range of postal services is no longer needed. Part IV explains how postal pricing and regulation can cause competitive problems for private firms because of incorrect measurement and misallocation of attributable costs and because of the potential to misuse Ramsey pricing principles. Part V presents four options that are available to the Canadian Parliament for addressing the problem of protecting efficient competition from the postal monopoly.

Introduction

Mail delivery is one of the few economic activities that has avoided the wave of deregulation and privatization that has swept network industries over the past two decades. Nonetheless, postal services throughout the world are receiving critical reexamination, not only because of the technological developments that appear to be changing the essential character of communications, but also because of a growing body of experience and scholarly research concerning the regulation and public ownership of enterprise. Such experience and research now provides policymakers with a better understanding than they had a generation or more ago of the costs and benefits of the existing way in which postal services are produced.1 This Article builds on that experience and research by examining the following questions concerning the business activities of Canada Post Corporation (Canada Post) in a competitive environment: What should be the appropriate mandate of Canada Post? In particular, is Canada Post a natural monopoly and. if so, what fonn of regulation would best serve Canadian consumers? If the delivery of letter mail is not a natural monopoly, what basis exists for retaining Canada Post's current statutory monopoly? What potential exists for Canada Post to abuse its statutory monopoly-and other statutory privileges and immunities-to compete unfairly against efficient private suppliers of postal services?

Canada Post's "exclusive privilege" to provide letter mail protects Canada Post from competition in that particular market. Public ownership and control exempt Canada Post's actions from the corporate governance that is characteristic C?f private enterprises. Despite repeated findings that Canada Post does not take advantage of its autonomy and letter mail monopoly to subsidize its entry and expansion into competitive markets, such as parcel post and express mail, the existence of a government-owned monopoly that may participate in competitive markets perpetuates the potential for such abuse and raises a fundamental issue: whether Parliament's grant of a monopoly to Canada Post over the delivery of letter mail should be used to restrict or supplant private commerce in other markets. Even if no crosssubsidization or predatory pricing ever occurs, Canada Post clearly has an advantage over its competitors because it has in place a government-nurtured. nationwide delivery system that may yield synergies from the joint provision of other communication, transportation, and delivery services. This Article examines the justifications for Canada Post's publicly protected postal monopoly and public ownership and control. The economic and legal analysis presented demonstrates that the extension of the postal monopoly into competitive markets should be prevented or, conversely, Canada Post's statutory monopoly over letter mail should be abolished and open competition in all communications services should be allowed.

Public provision of an essential service can be justified economically if policy makers can identify a market failure that prevents private provision of the service and if they can discern an important advantage that the government has in providing the service. Proponents of the public provision of letter mail by Canada Post, however, have failed to identify any such market failure. Postal services are far from being "public goods" because costs are sensitive to volumes. congestion externalities in production are present, and customer access can easily be excluded. Moreover. pricing of delivery services rations access to postal services, as it does with any privately provided product or service. The absence of market failure is also evident from the extensive services that private carriers of parcel post, express mail, and package delivery provide. The presence of multiple substitutes for public postal services-including telecommunications and facsimile, electronic mail, private carriers, and transportation-effectively mitigates any losses that might arise from some government advantage, however unlikely such an advantage may be.

The market failure that typically is used to justify public control of entry, although not necessarily public provision of a service, is, that the market cannot achieve cost savings from natural monopoly. This discussion demonstrates that, although there may be some economies of scale and scope in postal delivery services, those economies are far from sufficient to argue for a protected monopoly for the services. Even if there were such a monopoly, firms providing the delivery of letter mail could be privately owned, as are public utilities.

The same reasons that favor private over public provision of' postal services apply to the question of whether the government should compete with the private sector for providing those services. If the private sector can provide the services, there is no role for government in the market as supplier. Moreover, when the expansion of government provision of such services interferes with private provision, thus reducing opportunities for private concerns to recover their investments, government supply of postal services represents a taking of private property by interfering with ongoing commercial concerns.

Part I of this Article outlines the regulatory and institutional setting in which Canada Post operates, including the nature and extent of Canada Post's legal monopoly. Part n demonstrates why technological justifications for the postal monopoly are no longer valid. Part m establishes that public provision of the full range of postal services is no longer needed. Analogizing to experiences of the u.s. fostal Service. Part IV explains how postal pricing and regulation can cause competitive problems for private finns because of incorrect measurement and misallocation of attributable costs and because of the potential to misuse" Ramsey pricing principles.

Part V presents four options that are available to Parliament for addressing the problem of protecting efficient competition from the postal monopoly. The first is for Parliament simply to acquiesce to Canada Post's current pattern of empire building. The second is to privatize Canada Post. The third is to commercialize Canada Post; that is, to tum Canada Post into a publicly-owned business free of any statutory privileges or burdens relative to private finns. The fourth is to allow Canada Post to retain its exclusive privilege and all other statutory privileges and burdens, but to subject it to far more rigorous public oversight Commercialization may be the most attractive option because it is politically feasible and would appreciably enhance ec0- nomic welfare.

The concern with protecting efficient competition from the postal monopoly figures prominently in the recently released report of the Canada Post Mandate Review (Review). In fact, the Review recommends withdrawal of Canada Post from "competition with the private sector in areas of activity outside.its core public policy responsibilities for providing postal services." Specifically, the Review finds "that the competitive activities of Canada Post, based as they ate on the foundation of the corporation's exclusive privilege and of the network it has built with public funds. are incompatible with basic principles of fairness". It further fmds "that the emphasis on competitive activities has distorted Canada Post's corporate culture and behaviour, diverting it away from a focus on the public service and public policy responsibilities that are the reasons for its existence." Moreover, the Review notes that the corporation's diversification into competitive markets has failed to produce financial gains.

Even though the Review's recommendation charts a course significantly different from the one on which Canada Post cuaently is embarked. the rationale behind the recon;unendations essentially is devoid of economic analysis regarding the costs and benefits of regulated state monopolies. In contrast, this Article explicitly relies on economic analysis in examining Canada Post's participation in competitive markets.

I. The Existing Regulation of Canada Post

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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