June 5, 2017 (RARC-WP-17-009)
- The parcel market has evolved rapidly over time, significantly altering the relationship among the players.
- The parcel market used to be a zero-sum game where growth in parcel delivery by one entity meant a reduction in parcel delivery by competing firms.
- Professor Panzar’s thereotical model shows that large parcel delivery companies are threatened by more than competition amongst each other — their real battle is over package volumes under the threat of self-delivery by large retailers.
The rise of ecommerce and the increased demand for parcels has radically changed the parcel market, attracting new entrants, including large retailers venturing into self delivery. These changes have not only increased the competition in the parcel market, but have also changed the dynamics within the market — so much so that the relationship between the players has been turned on its head. With these thoughts in mind, the U.S. Postal Service Office of Inspector General (OIG) asked Professor John Panzar, an expert in postal economics from Northwestern University and the University of Auckland, to provide a theoretical model on the modern parcel market. Though his work is theoretical, its findings have important strategic implications for the Postal Service.
In his theoretical model, Professor Panzar shows that large parcel delivery companies are threatened by more than competition amongst each other — their real battle is over package volumes under the threat of self-delivery by large retailers. In the past, economic theory would suggest that a simple strategy of setting postal price just slightly below its competitors’ prices may have worked best. However, in this more evolved parcel market, the post needs to seek out a price that exceeds unit cost and is not only lower than the competitors’ prices but also low enough to discourage the retailer from self-delivery. However, the postal price should be set no lower than this, as any price below this point would just result in revenue leakage.