Entry in Parcel Markets: Applying Fudenberg and Tirole’s Taxonomy

We utilize standard economic models in which competing firms interact strategically to analyze the evolution of parcel markets after market liberalization. Our starting point is a parcel market with an incumbent postal operator with a universal service obligation that faces market entry. The incumbent has various options for dealing with the threat of market entry or with market entry that has taken place. Depending on the entry cost, strategic interaction is better understood as quantity competition à la Cournot or price competition à la Bertrand. In sparsely populated rural areas, fixed cost is high and capacity commitment is possible. Therefore, competition takes place in quantities, which are strategic substitutes, and the incumbent postal operator can in principle deter market entry. However, a vertically integrated firm with guaranteed high quantities (e.g., Amazon) or an established distribution infrastructure (e.g., a retailer) may still enter the market. In both cases, the universal service obligation induces the incumbent to overinvest in capacity and become a top dog, which is an optimal strategy. In densely populated cities, in contrast, fixed cost is low and capacity commitment not credible. Therefore, firms compete in prices, which are strategic complements. The universal service obligation prevents the incumbent postal operator to aggressively set low prices, and consequently, prevents it from deterring entry. That is, the incumbent needs to accommodate the entrant. Since the universal service obligation already mitigates price competition, it is ambiguous whether the incumbent postal operator invests to become a pacifistic fat cat.