Quality Incentives in Network Industries: a Case Study and a Model

We analyze the REIMS II agreement in the European postal industry. The agreement about prices for delivery was accompanied by quality constraints on time for delivery. Data suggest that: (i) quality does improve signi?cantly over time; (ii) but costs (and therefore prices) di?er a lot between PPOs and this is not just the result of di?erences in universal service obligations or quality di?erences, but rather strongly indicate that some PPOs su?er from a signi?cant lack of e?ciency. This is due to the fact that we are very far away from a fully liberalized market with e?ective competition. This leads us to observe that there has not been a serious cost-bene?t analysis of the quality incentive scheme, especially since the existing quality incentive is distortive: it is higher the higher the domestic prices/costs (which might come at the expense of cost reduction incentives).