Abstract
The graveyard spiral conjecture applies to posts that have a universal service obligation and uniform prices. It begins with the fact that these posts must cross-subsidize unprofitable delivery routes with profitable ones. This causes prices on profitable routes to be higher than need be. Under liberalization this increment in price allows cream skimming to take place by a less efficient entrant whose costs are higher than the incumbent, but who can set lower prices on the most profitable routes. Once profits on these routes are lost to the entrant, the incumbent is forced to raise prices because its average unit cost has increased and it needs additional revenue to maintain its level of profit (breakeven or otherwise). This could lead to a continuous cycle of higher average unit costs, lost profits and forced rate increases. Thus, it is conjectured that the current practice of cross-subsidy is unsustainable without a monopoly. In other words, liberalization may well lead to a graveyard spiral (Crew and Kleindorfer 2000, 2001).
The views expressed in this paper are those of the authors and do not necessarily represent the opinions of the Postal Rate Commission.
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References
Cohen, Robert H., William W. Ferguson, John D. Waller, and Spyros S. Xenakis. 2000. “Universal Service without a Monopoly.” In Current Directions in Postal Reform, edited by M.A. Crew and P.R. Kleindorfer. Boston, MA: Kluwer Academic Publishers.
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Cohen, R., Robinson, M., Sheehy, R., Waller, J., Xenakis, S. (2003). An Empirical Analysis of the Graveyard Spiral. In: Crew, M.A., Kleindorfer, P.R. (eds) Competitive Transformation of the Postal and Delivery Sector. Topics in Regulatory Economics and Policy Series, vol 46. Springer, Boston, MA. https://doi.org/10.1007/978-1-4419-8915-4_6
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DOI: https://doi.org/10.1007/978-1-4419-8915-4_6
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