In the postal services sector, the effect of cream-skimming is made worse by constraints mandating uniform prices. It is more expensive for the provider to deliver mail to a village in the Ardennes than to deliver it in the center of a city; but postage costs are the same in each case for the sender, and the stamp prices are calculated on a national average cost. Because of the uniform price of postage, mail delivery in urban areas is artificially profitable (and thus more attractive to competitive providers); delivery in rural areas appears not to be profitable, since the price of postage is not linked to the cost of delivery in that area.
 
The entry of competitive providers in this market threatened the financing arrangement for providers of the universal service. The profits made by the historical provider fell or disappeared, although losses related to non-profitable segments continued. The mechanism of cross-subsidies within the provider’s business was upset by the entry into the market of alternative providers. The importance of this problem is a function of the intensity of competition, which affects results in profitable segments, and the definition of universal service, which affects the losses made in the non-profitable segments. If competition is very sharp and if the constraints placed on the universal service provider are significant, the financial viability of the universal service provider cannot be assured. In the postal sector, before liberalisation and the definition of the conditions of competition by the Belgian state, the fears on the part of the historical provider were considerable.

Compensation for the universal service provider

The provider of the universal service was thus justified in requesting additional compensation when services represent an unfair burden, thus placing the universal provider at a competitive disadvantage. In a liberalised market, it is necessary to create a compensation mechanism for the universal provider that can replace the role of cross-subsidies in the former monopoly situation.  Axel Gautier has produced several studies of the universal service, its costs and its financing (1). In the view of this Liège researcher, in the postal sector, the constraints placed on the universal service depend on the detailed obligations that are included in the agreement, on the characteristics of the postal services market, and on the particular geographical features of a country. These three kinds of factor affect the actual cost of services provided and the intensity of competition in the mail delivery business. In an article published in the Review of Network Economics (2), Axel Gautier and Dimitri Paolini examine the significance of specific geographical features in this market, and they demonstrate that the choice of an appropriate mechanism for sharing the duties of universal service between providers depends on these geographical features. He concludes that with regard to the financing of universal services, there is no single formula that fits all cases.
 
If we analyse the content of the European Directive that governs the liberalisation of the postal service sector, it appears that states have two choices: either they can give subsidies to the universal postal services provider, or they can spread the losses made by that service between different providers by creating a fund which goes to pay for the universal service. But in either case, it is necessary to recognise that there is no “one size fits all” solution. Specifically, the geographical characteristics of individual countries have to be taken into account in the search for an equitable solution. Here are some of the types of situation that have been considered:

-  a dual territory that includes two distinct regions, one that is urban in character and the other rural;
- a homogeneous territory in which most of the people are in urban areas;
- a territory that presents an intermediate configuration that is more uniform.

These different territory configurations are representative of the geographical diversity of European countries. In Sweden, which is of the dual type, competitors in the postal sector only serve 40% of the territory, essentially that of larger cities and towns, while in the Netherlands, a homogeneous type territory, various providers operate everywhere in the country.

(1) His work is focused on the effect of constraints on the universal service, particularly uniform pricing and the obligation to provide universal coverage, and on the way in which companies compete with each other. He is particularly interested in a mechanism for setting prices (http://hdl.handle.net/2268/72187), demonstrating that the universal service releases price competition, and its the impact on the deployment of competitive networks (http://hdl.handle.net/2268/95559). After analysing the impact of the universal service obligations on the way in which companies compete with each other, he studied measures of the net cost of the universal service for the business that is in charge of providing it (http://hdl.handle.net/2268/115428), with the understanding that the provider can demand compensation for the universal service provision when it represents an unfair burden.  He showed that measures of the cost of the universal service cannot be dissociated from a mechanism for financing. In other words, the cost of the universal service depends on its financing mechanism. For example, a tax levied on new market providers tends to reduce the extent of the geographical coverage they will offer, and thus reduces competition in the market. And if there is less competition, the net cost of the universal service falls.
(2) Gautier, A, & Paolini, D. (2011). Universal Service Financing in Competitive Postal Markets: One Size Does Not Fit All. Review of Network Economics, 10(3), 6.