Mail delivery does lend itself to these kinds of franchise arrangements. It is useful to describe exactly how mail is collected, sorted and delivered. Mail is generally received from customers at multiple points. It is then transferred to a node, and sorted. It is then transferred to another node where it is re-sorted for onward delivery to specific customers. The service lends itself to competition because a) there are very low levels of sunk costs (unlike other network industries), and b) quality is easily observable - delivery times can be easily monitored. Transport capacity can also be leased in small portions without appreciable cost disadvantages. Postal operators have also not been responsible for built out infrastructure in the transportation area. Postal operators use roads and airways that already exist, and so the transportation cost is limited to vehicles (unlike in gas, telecom or electricity, where there are substantial sunk costs).

Under franchise bidding, the inward and outward sorting of mail would be retained by the incumbent JPCo. JPCo would be subject to price regulation in this area. The transportation of mail between the nodes would be subject to competition. The transportation of unsorted mail to and from the nodes would be part of the franchise bid. The successful bidder would win both the collection from and delivery to a certain region, thus enabling monopolies of scope to be leveraged. The franchise bid would only apply in rural areas, so that the incumbent would continue to serve urban areas. In the Chile telecommunications privatization, there were auctions for both the rural areas as well as the USO that accompanied them. The companies that bid on certain segments also bid an amount representing what fund they would need to support universal service. The winner was the company with the lowest universal service requirement (all other things being equal). The advantage of this mechanism is that it applies continuous downward pressure on costs, and thus lowers the real cost of providing the universal service obligation.

Commentators have evaluated the possibility of auctioning the reserved sector and the USO. One of the more recent studies on the precise auction mechanism which could be used is an auction where small geographic areas would be put up for auction, along with the USO. $ ^{83} $ These studies suggest that the current model of USO which is used in many countries does not properly take into account some very important dynamics. These include the fact that costs vary over different areas, and so the actual cost of providing universal service is not uniform. Yet many USO funds assume that these costs are uniform. By ignoring the lack of uniformity of costs, fixed USO funds do not liberate forces that will drive USO costs down. Since costs of providing universal service vary from customer to customer, the ideal world would be one where the USO provision for each customer most closely mirrors the actual cost of providing that service to that customer. Anything else is market-distorting. However, this market distortion cannot really be avoided, but it can be minimized. The advantage of the auction process is that (a) it is the market and not the regulator who decides how much funding is required to satisfy the service it deems to be required and (b) it will lead to the application of downward pressure on costs. The regulator will also be disciplined to ask questions as to what level of universal service is truly required.

In the Global Symposium for Regulators 2002, the ITU considered minimum subsidy competition auction mechanisms. In considering what the maximum subsidy ought to be, the ITU recommended that a financial cost model be used, or that the market be allowed to determine the final amount of the required subsidy through competitive bidding. In the latter case, the maximum subsidy could be announced prior to the action, and bidders then would identify in their bids the