Study Notes

Competition Policy - Postage Prices in the UK

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

The postal service industry in the UK has undergone significant structural change in recent years.

The industry was liberalised / opened up to competition firstly in parcels and more recently in the market for collecting, sorting and delivering household and business mail. The near monopoly of the Royal Mail has come under increasing threat and challenge from a growing number of new entrants who have been granted a licence to operate in the UK – these new players include TNT, UK Mail and DHL.

The regulatory structure of the industry has changed - the Postal Services Act 2011 transferred regulation of postal services from PostComm to Ofcom. A key part of the UK postal industry is the existence of a universal postal service – this has two parts:

  • 1.A national mail network – including once a day delivery to every postal address in the UK
  • Royal Mail is required to deliver six days a week
  • 93% next day delivery target
  • 2.An affordable universal tariff / pricing system – delivering a fair rate of return for postal businesses but also taking into account affordability for all consumers

The Royal Mail Group is the only licenced business in the UK thought capable of meeting this universal postal service. Royal Mail has made big efforts in recent years to increase efficiency and cut costs but they face the problem of a long-term fall in the volume of first and second class mail being sent (there are many cheaper alternatives!). They make a loss on each second class letter sent; this is largely funded by profits elsewhere in the mail market and exploiting economies of scale from their postal network. In 2011, the Royal Mail's Letters & Parcels International business had an operating loss of £120 million.

Competition has posed many challenges for the Royal Mail, since the market was opened up to new licenced businesses, competitors have been winning business to collect and sort mail, paying to use Royal Mail's delivery network. In 2011, Ofcom gave the Royal Mail more commercial freedom to set postage charges over a seven year period. On 31 March 2014, the price of a First Class stamp rose by 2p to 62p and the price of a Second Class stamp rose by 3p to 53p. The price of a First Class Large Letter stamp increased by 3p to 93p and a Second Class Large Letter stamp by 4p to 73p

UK Stamp price changes in April 2014

Product

April 2011

April 2014

First Class stamp (standard)

46p

62p

Second Class stamp (standard)

36p

53p

First Class stamp (Large Letter)

75p

93p

Standard Parcel up to 2kg

£4.41

£5.30

Will these stamp price increases lead to a steep decline in the volume of mail sent? The answer depends on the price elasticity of demand for postal services. Digital competition will probably be an effective deterrent to the Royal Mail if it wants to raise stamp prices further. The regulator also stands by to see if improved financial performance is largely the result of stamp price hikes or more favourably, the end product of improvements in productive efficiency throughout the business.

End to end competition in the UK postal market

As of 2014, TNT Post are now in direct competition with Royal Mail in parts of London, Liverpool and Manchester – they now provide a full 'end-to-end' service in these areas, delivering business post directly to the addresses of customers

Royal Mail privatisation

In October 2013 the Royal Mail was part privatised

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