Economics for Business Essay

When we speak about the UK market of postal services, its image is indispensably connected with the notion of monopoly. For more than 350 years the UK postal market has been dominated by the Royal Mail. However, since 2006 the market has been open to competitors, and the postal services’ market players strove for possessing equal business opportunities. It is essential to review the current trends in the postal services market within the UK through the prism of monopoly, competition, and their benefits/ effects for the consumer and the overall efficiency/ quality of postal services in the country. Monopoly Royal Mail in the UK has for long been referred to as â€Å"privileged and increasingly unusual position of being a state-owned company protected from the market place† (Crew & Kleindorfer 2007, p. 7). As a result, Royal Mail has become one of the brightest representatives of what monopoly is within the British economy as a whole. It is essential to understand that when we speak about the state of postal services in the UK market, it cannot be described other than monopolistic before the year 2006. Moreover, even in the light of the improving communication strategies, Royal Mail was not losing its position, and was even strengthening it: â€Å"we are still dependent on the efficient, speedy delivery of bills and payments to our homes and businesses in exchange for the price of a stamp† (Starkey 2006, p. 71). Despite the primarily negative attitudes towards the monopolistic position of Royal Mail, monopoly is an objective market notion, and as any other market structure, it possesses its benefits and its disadvantages. In order to arrive to relevant conclusions, we have to consider both. One of the major advantages of monopoly, and particularly in the postal services, is exercising the principles of the economy of scale: in smaller postal enterprises this task may become impossible to fulfill. Moreover, having more available free resources, monopolies are frequently viewed as being closer to innovation than any other smaller enterprises within the postal services sector. However, this assumption is rather argumentative, and economic professionals tended to evaluate Royal Mail’s position within the postal services market as â€Å"negatively monopolistic† (AICES 2006, p. 8). This simply meant that Royal Mail was not striving towards exercising its free resources to bring innovation into postal services sector; as a result, competition was viewed as the only resolution for that difficult economic situation. This is a well-known conflict, when one tries to assess the opportunities and drawbacks of the monopolistic market structure: while monopoly generates significant profits which could potentially be directed at innovations, it simultaneously lacks any incentives to make these innovations real. This conflict has become the major reason for opening the market of UK postal services to competition. It is even more interesting to bear in mind that competition is not always the best solution to all economic problems of monopoly, and the responses to opening the postal market in the UK are still dubious and extremely various. â€Å"Much of nonsense is due to the liberalization of postal services. Here commercial firms bid for, and take, the lucrative part, the business mail. We all know what happens then. My own bank envelopes come with a commercial firm’s logo; the various branches email the details to a central department, where statements are prepared, one truck takes it all away and they only have to deliver to main postcode areas. (Clark 2007) The monopolistic structure of the UK market was not connected with any type of competition: the market was dominated by Royal Mail, and this VAT exempt company served the only postal services provider in the country. With the Government being the major Royal Mail’s shareholder, it was understandable why this provider possessed multiple economic benefits and did not strive to improve the quality of its services (Sloman 2004, p. 45). For us to understand all implications of the UK postal services’ liberalization, we come to the description and evaluation of the current situation within the UK postal market sector. The new market structure of postal services in the UK It is very important to understand how the postal services’ market in the UK looks at present. It should be noted that Royal Mail currently faces the competition from other 17 postal companies, and this market structure seems to create favorable conditions for effective competition. The largest portion of mail within this market goes from businesses to consumers (Starkey 2006, p. 72). â€Å"Several companies have signed â€Å"access† agreements with Royal Mail, allowing mail they have collected and sorted to be fed into Royal Mail’s network for final delivery. Royal Mail made 2. 4 billion access deliveries in 2006-07†³ (Starkey 2006, p. 72). Even with the 17 new postal companies becoming competitive to Royal Mail, the latter still provides 99% of all postal deliveries within the UK. â€Å"We can’t make the companies take advantages. We can just set the rules and put in a licensing regime, but Royal Mil will always be the major service provider† (Simpkins 2005). Other alternative postal service providers are currently capable of providing any types of postal services, with the exception of non-bulk items’ delivery, less than 100g in weight (Crew & Kleindorfer 2007, p. 8). Thus, is it possible to suggest that the postal services market in the UK has become as open as many had expected it to be? Of course, it is possible that the full effects of opening the UK postal services market are not yet perceived by the customers and businesses. However, it is also probable that there still exist significant barriers to competition within the postal market. â€Å"Postcomm is concerned that the competition so far has been too limited, and that this has allowed Royal Mail to get away with providing customers with a poor quality service† (Crew & Klenidorfer 2007, p. 9). Before 2006 the mail market of the UK was stated to lack competition, but possessing a considerable potential for growth; as a result many viewed competition and market openness as the best resolution to multiple issues postal monopoly in the UK traditionally rose (Falkenhall & Kolmodin 2005, p. 10). The opposition of Royal Mail to opening the market was natural and understandable: the company viewed this step as the direct pathway towards reduction of the profit margins, but the situation could not remain unchanged due to contemporary economic requirements towards competition. The efficiency of postal services after opening the market will gradually change. This process will be slow due to multiple barriers created on the way of potential Royal Mail competitors. However, some of the following results can be expected within the long-term period, and after numerous postal companies acquire fair access to different niches of the postal services’ market. First, the emergence of new services will increase the overall efficiency of the postal services in the UK. It is already evident that being surrounded by multiple competitors that strive for conquering and expanding their market share, even Royal Mail had to introduce a three-year plan of renewal: â€Å"changes have included the introduction of Single Day Delivery, reviews of its mail centers and transport and a significant number of redundancies† (Starkey 2006, p. 74). Second, the competition further increases efficiency by providing foreign market players with the opportunity to enter the market of postal services; as a result the efficiency of postal services at the international level also increases, which is especially important for businesses. Royal Mail was once blamed for being underdeveloped in terms of mechanizing its services, and making them more efficient (Falkenhall & Kolmodin 2005, p. 14). The current market processes in the UK postal services structure urge companies to reduce their workforce and to implement effective IT solutions for better services provision. Although, this does not mean that creating competition in the area of postal services inevitably leads to unemployment. With the creation and expansion of private postal operators, the amount of required qualified workforce increases, and we can state that competition only contributes into changing the balance of workforce between the operators. Competition is the best tool of increasing profitability and efficiency of national postal operators (Crew & Kleindorfer 2007, p. 44). One may suggest that the discussed changes in the market were long anticipated, and the fact of legal uncertainty and Royal Mail’s monopoly seriously hindered the process of investing into postal services by private operators. What one can expect now is the growing efficiency of the postal services along with the increase price control and the constant process of quality improvement in the structure of postal services in the UK. It should be noted, that the discussed improvements will and could occur in the ideal economic situation, when the openness of the market means providing real fair opportunities for competitors. However, the reality of the situation is different: â€Å"full competition in the UK postal market is blocked by two very fundamental issues: Royal Mail’s unique VAT exemption and the focus on downstream access† (Starkey 2006, p. 4). Private players of the postal market cannot access fair business opportunities and increase their efficiency against the zonal pricing introduced by Royal Mail not long before opening the market. Royal Mail has an access to changing its prices without being reviewed by Postcomm (Clark 2007). As a result, we face the challenge of competition vs. the realities of destabilization in the UK market of postal services. We cannot objectively state that the competition was introduced to increase efficiency, when Royal Mail creates unfavorable conditions for the rival operators (Starkey 2006, p. 5). While the efficiency of postal services changes very slowly, it is more than evident that the customers have already benefited from making the market of postal services competitive. First of all, private operators have changed the emphasis of their services from being business-oriented to being customer-oriented. As a result, â€Å"new entrants are building their products around their customers’ needs rather than asking their customers to fit in around their businesses† (Starkey 2006, p. 75). For example, numerous private customers have already perceived the benefits of later collection times (AICES 2006, p. 11). It is anticipated that private market players will keep expanding the range of postal services in case no barriers are created against these initiatives. The impact of competitive postal services on the customer is better to be viewed through the prism of Royal Mail achievements. The company has been the leading postal provider for almost 400 years, and its changing position and market attitudes can display the tendencies of economic development as a result of market openness. The major changes have taken place in company’s attitudes towards their customers: â€Å"although there is still some way to go to embed a culture of commercial customer focus throughout the organization, there is no doubt that Royal Mail has turned the corner† (AICES 2006, p. 18). Customers have acquired additional power in maintaining effective relations with the postal service: Royal Mail services turn towards being more attentive to their customers. They have displayed new abilities to listen to the customer, and to change in accordance with the customer’s requirements. Competition appears to be the matter of choice for the customer; consequentially, companies in the postal services sector have more incentives to pursue customer value through innovation and better customer satisfaction. The current situation in the UK market of postal services is still much confused and contradicting. On the one hand, we have the evidence of customers being completely satisfied with postal services being competitive. On the other hand, we cannot agree to the fact that the efficiency of postal services has increased even through the prism of growing profitability of some postal services. Certainly, the postal services have reached the stage at which costs are more comparable to the prices of postal services: the elimination of monopoly has opened the gateways to being more reasonable and more objective in setting the price for postal services. Simultaneously, it is difficult to disagree to the fact that Royal Mail still occupies 96% of the UK market (Starkey 2006, p. 6). The essence of competition is not in attracting rivals, but rather providing consumers with choice. In this situation efficiency of postal services is replaced by more important customer preferences. Monopoly is a â€Å"big, big issue, and it is a test of our society as to whether we are to organize everything to make a profit† (Benn 2007). Royal Mail is the embodiment of the economic paradox in the area of postal services in the UK. This paradox lies in connection with economies of scale. While with the large delivery volumes Royal Mail’s unit costs are low, but with Royal Mail being monopolistic the company can hardly be called efficient. Thus, with the price of Royal Mail’s services being extremely competitive and sometimes too low, it is simultaneously inefficient (Falkenhall & Kolmodin 2005, p. 29). Competition thus appears more beneficial for the customers, than for the companies in the postal services’ niche. It is essential that other private players can have access to similar scale benefits even if they cannot compete to the well-branched delivery network of Royal Mail. The efficiency of Royal Mail’s rivals cannot be increased until the issue of VAT exemption is resolved. â€Å"The VAT regime for post in the UK is a particularly pernicious barrier. Most people here will be aware that although Royal Mail is VAT exempt, its competitors are not, which causes pricing distortions especially for those customers that are also VAT exempt† (Starkey 2006, p. 76). Simultaneously, there is another serious concern about the rival companies’ behavior on the market. Some specialists fear that what takes place in Royal Mail is subsidizing lighter items with heavier mail, subsidizing social users for the account of business users, etc (Crew & Kleindorfer 2007, p. 51). In this situation competitive postal companies will strive for taking the most lucrative market niches, leaving Royal Mail without income from the most profitable services. However, this is where VAT exemption can serve for the benefit of the company: due to the lower prices, it is hardly possible that open competition will jeopardize the universal service and Royal Mail in general. In this situation one may possible predict the instability of the postal services market in the short-term period, and instability of the market structure is no better than previously existing monopoly. The UK postal services have appeared in the extremely essential stage of reconstruction – introducing competition cannot go smoothly for all market players. It should be noted that the issues of elimination or threat to the universal service are easily neutralized, and universal services can in no way be compromised by introducing competition. Any objective analysis shows that consumers, as well as businesses, have benefited from market opening through higher quality. In addition, prices have been substantially reduced for business customers while households have been protected from price increases† (Sloman 2004, p. 97). Yet, our objective analysis shows that competition in the UK postal services is in its initial stage. We have proved that customers evidently benefit from making the post market competitive, but the economic efficiency of the postal services is still to be achieved and increased. Conclusion We have come to conclusion that the effects of competition in the UK market of postal services are primarily viewed within the area of consumer satisfaction. The overall economic efficiency of postal services still leaves much to be desired. However, introduction of competition is the solid basis for providing consumers with choice, and expanding the market structure of postal services in the country. Certainly, monopoly possesses its advantages, but competition is the best perspective for both the new private players and Royal Mail in creating incentives for development and improvement.