“Is Postal Service a Natural Monopoly?”: A 30-Year Retrospective on Panzar’s Seminal Paper

Three seminal papers have shaped the postal sector in the past two centuries, the first by Sir Rowland Hill in 1837 (Hill, 1837), which introduced the penny post, a uniform rate paid by senders for mail delivery. Previously charges were based on distance and paid by the receiver. The second seminal paper, by Ronald Coase 1939 (Coase, 1939) addressed issues raised by Hill a century earlier. Under political pressure to support uniform postal rates, Hill withdrew his plan for secondary distribution at cost-based rates and backed uniform rates even though he believed uniform rates made little sense for basic public services such as railroad transportation. Hill also questioned whether the post is a natural monopoly. He thought competition would lower delivery costs. He felt his position would run into difficulties because the Post Office was forced by the government to deliver mail in certain districts at a loss. Coase (1939) pointed out that “an agitation to remove the Post Office monopoly was not likely to get Government support” and that this might have induced Hill to reach a sort of compromise in its reform. In Coase’s view, the monopoly condition, coupled with uniform pricing, might generate inefficiencies and undesirable losses, leading to cross-subsidies to villages, and thus a “usage tax” on customers in towns. The relationship between the geographical dimension of Postal Service monopoly, the nature and extent of universal service and cross-subsidies among areas with different density in population, the interdependence between primary and secondary distribution designs are crucial to the definition of postal service as a natural monopoly.