The Economics of 

Terminal Dues

Final report

U.S. Postal Regulatory Commission 

30 September 2014 

Final report 

Authors: 

Henrik Ballebye Okholm 

Anna Möller Boivie 

Nina Russell 

Jacek Przybyszewski 
Final report 

Preface 

The Universal Postal Union (UPU) system of terminal dues governs payments between designated postal 

operators for the transport, sorting, and delivery of cross-border letter post items1

 in the destination 

country. UPU rates are used by many postal operators across the world, both directly and indirectly (as a 

fall-back provision). 

Previous research has raised concerns that the current UPU terminal dues system may be problematic. 

Problems highlighted primarily relate to five areas: (i) distortion of competition, (ii) insufficient 

compensation for delivery of inbound letter mail creating financial transfers between postal operators, 

(iii) distortion of international mail flows due to arbitrage, (iv) inefficient foreign aid, and (v) distortion of 

competition between retailers in the domestic market and markets abroad and between retailers in 

developing and industrialised countries. 

While there has been some work estimating the potential magnitude of distortions related to insufficient 

compensation for inbound letter mail, no one has yet analysed the wider effects of the terminal dues 

system through the lens of economic theory. 

Against this background, the U.S. Postal Regulatory Commission has asked Copenhagen Economics to 

analyse the system of terminal dues from the perspective of economic theory. The output of the analysis 

should respond to the following five questions: 

 Are the problems arising from the current terminal dues system and highlighted in earlier research real from an economic theory perspective, and are there other problems? 

 Do bilateral or multilateral agreements cause the same or different problems? 

 What system of terminal dues would (in theory) solve the problems identified, without distorting 

letter markets and the larger global market? 

 What is the practical solution to the identified problems given the different levels of economic development in UPU member countries? 

 What is the most suitable framework for measuring the market distortions arising from the current terminal dues system? 

This report presents the findings of our research conducted between June and September 2014. Along the

way, we have benefitted from input and feedback from several market experts, including our subcontractors from Ipostes, Jacob Johnsen and Walter Trezek. 

The structure of the report is the following: Chapter 1 provides an introduction to terminal dues, outlines 

the distortions highlighted in previous research, and presents the methodology for our work. Chapter 2

contains our analysis of existing systems for terminal dues and the potential distortions created. Chapter 

3 discusses the underlying drivers for the identified distortions and proposes a new system that would

eliminate the identified distortions. It also discusses the practical and political considerations that may 

 

1

 For a definition of letter post, see Box 1 
Final report 

prevent the implementation of the proposed solution and proposes a practical solution to cope with these 

concerns. Finally, chapter 4 proposes a two-step framework for assessing the likelihood, significance, and 

magnitude of distortions. 
Final report 

Table of contents 

Preface 1

Executive summary 10

1 Background and methodology 16

1.1 Overview of international mail delivery 16

1.2 Terminal dues 17

1.3 Market distortions highlighted in existing literature 23

1.4 An economic framework for identifying distortions 

created by terminal dues 31

2 Distortions created by current systems 

for terminal dues 34

2.1 Summary of findings 34

2.2 Framework for analysis: Value chain approach 36

2.3 Distortions created by terminal dues 39

2.4 Distortions created by alternative terminal dues systems 48

3 Designing a new system for terminal dues 52

3.1 Summary of findings 52

3.2 Drivers of distortions and proposed solutions 55

3.3 Designing a non-distortionary system for terminal dues 69

3.4 Need for a practical solution 74

4 Measuring distortions of terminal dues 78

4.1 Summary of findings 78

4.2 General framework for measuring distortions 80

4.3 Estimating the likelihood and significance of potential 

distortions 81
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4.4 Measuring economy-wide effects of identified distortions 102

References 106

A Appendix 110
Final report 

List of tables 

Table 1 Top five international letter post flows (2011) ....................... 16

Table 2 Overview of systems for terminal dues .................................. 19

Table 3 Universal Postal Union groups .............................................. 20

Table 4 Target countries constrained by UPU floors or caps ............. 21

Table 5 Effect of changes in terminal dues ......................................... 27

Table 6 Overview of distortions created by terminal dues ................ 34

Table 7 Overview of distortions and their underlying drivers .......... 36

Table 8 Overview of distortions created by UPU terminal dues ....... 48

Table 9 Distortions created by REIMS ............................................... 49

Table 10 Distortions created by bilateral agreements ....................... 50

Table 11 Overview of criteria for non-distortionary terminal 

dues ....................................................................................................... 53

Table 12 Economic distortions and their drivers ................................ 56

Table 13 Distortion of competition for last-mile activities ................. 57

Table 14 Distortion of competition for first-mile activities ............... 58

Table 15 Distortion of demand for services within and outside 

the terminal dues framework............................................................... 61

Table 16 Distortion of global mail and trade flows ............................ 64

Table 17 Transfer between designated delivery operators ................. 67

Table 18 Overview of criteria for non-distortionary terminal 

dues ...................................................................................................... 70

Table 19 General objectives for postal tariffs and terminal dues....... 71

Table 20 Fulfilment of objectives defined in postal regulation ......... 71

Table 21 Framework for measuring if distortions are real and 

significant.............................................................................................. 79

Table 22 Distortions – overview ......................................................... 80

Table 23 LRAIC for last-mile delivery: top-down vs. bottom-up ..... 83

Table 24 Data for identifying distortions of last-mile activities ....... 85
Final report 

Table 25 Data for measuring distortions in first-mile activities ........87

Table 26 Data for measuring distortions of demand for packets 

vs. parcels ............................................................................................. 89

Table 27 Data for qualification of distortions of global mail and 

trade flows ............................................................................................ 93

Table 28 Data for quantification of distortions of global mail 

and trade flows ..................................................................................... 97

Table 29 Measuring transfers between postal operators ................... 97

Table 30 Effect of changes in terminal dues ...................................... 98

Table 31 Data for measuring transfers between postal 

operators ............................................................................................. 102

Table 32 Application of a CGE model to terminal dues ................... 105

 
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List of figures 

Figure 1 International dispatch and receipt of letters, 2011 .............. 17

Figure 2 Distortions identified in previous literature ....................... 24

Figure 3 Terminal dues vs. domestic rates, United States ................. 25

Figure 4 Journey of a letter: Stylized example (bulk mail) ................ 37

Figure 5 Effects of terminal dues on prices in the value chain ......... 38

Figure 6 UPU terminal dues schedule by weight of item ................... 45

Figure 7 Foreclosure of as-efficient non-designated operator ........... 57

Figure 8 Foreclosure of as-efficient non-designated operator .......... 59

Figure 9 Non-distorted competition for first-mile activities ............ 60

Figure 10 Distortion of demand for services within and outside 

the terminal dues framework.............................................................. 62

Figure 11 Non-distorted demand for services within and 

outside the terminal dues framework ................................................ 63

Figure 12 Distortion of decisions to buy domestic vs. crossborder .................................................................................................... 65

Figure 13 Distortion of decisions to buy cross-border ...................... 66

Figure 14 Non-distorted decisions to buy domestic or crossborder ................................................................................................... 66

Figure 15 Non-distorted decisions to buy cross-border ..................... 67

Figure 16 Transfer between designated delivery operators .............. 68

Figure 17 No transfer between designated delivery operators .......... 69

Figure 18 Framework for measuring distortions of last-mile 

competition .......................................................................................... 82

Figure 19 Framework for measuring distortions of first-mile 

competition .......................................................................................... 86

Figure 20 Framework for measuring distortions of demand for 

packets ................................................................................................. 88

Figure 21 Framework for measuring distortions of global mail 

and trade flows .................................................................................... 90
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Figure 22 Example: CGE trade model ............................................... 103

 
Final report 

List of boxes 

Box 1 Definitions of letter post and parcel post .................................. 18

Box 2 Gains and losses created by below-cost terminal dues ........... 26

Box 3 ETOEs: Description and implications ..................................... 28

Box 4 Compatibility of UPU terminal dues with EU 

competition law ................................................................................... 29

Box 5 Remail: Description and implications ..................................... 30

Box 6 Market distortion leading to allocative inefficiency ................ 32

Box 7 Terminal dues and prices for cross-border mail ..................... 42

Box 8 Case: Terminal dues spilling over in delivery costs ................ 46

Box 9 Cost-oriented terminal dues may not eliminate

distortions ............................................................................................. 74

Box 10 Bottom-up approach to cost assessment ............................... 84

Box 11 Difference-in-differences analysis for cross-border mail ...... 94

Box 12 Gravity model estimation of global mail and trade flows ..... 96

Box 13 Estimating transfers between delivery operators .................. 99

Box 14 Previous estimations of transfers between operators .......... 101
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10 

Executive summary 

The current system of terminal dues administered by the Universal Postal Union (UPU) 

has been criticized for being problematic. A review of existing literature2 reveals five issues, highlighted as problems related to the current structure of UPU terminal dues: 

 Distortion of competition for first-mile and last-mile activities3; 

 Distortion of international mail flows, especially relating to remail; 

 Inefficient foreign aid; 

 Creation of financial transfers between designated postal operators; 

 Distortion of competition between retailers in the domestic market and markets 

abroad and between retailers in developing and industrialised countries 

The U.S. Postal Regulatory Commission has asked Copenhagen Economics to assess 

whether the issues outlined above constitute real problems from the perspective of economic theory, and whether the UPU terminal dues cause other problems. We have also 

been asked to provide suggestions for how the problems identified can be remedied and 

how the magnitude of the problems can be measured. 

Our analysis reveals that the issues identified in previous literature sometimes, but not 

always, constitute real problems from the perspective of economic theory as they create 

distortions of total welfare. In particular, we find that the application of different terminal 

dues to designated and non-designated operators distort competition among first-mile 

delivery operators, that is, service providers who compete for the business of the original 

senders (or shippers) of mail. We also find that terminal dues set at a level below the cost 

of last-mile activities distort competition among last-mile operators, that is, service providers who compete for intercity transport, sorting, and delivery of mail in the destination 

country.4

 In addition to this, we find that the current system of terminal dues increases 

demand for delivery services covered by the system relative to services outside the system. 

This leads to excessive use of packet delivery services at the expense of parcel delivery 

services.5 The structure of current terminal dues also leads to distortions in mail and trade 

flows by increasing demand for less efficient cross-border delivery of letter post6 (including packets), especially from certain countries. Finally, we find that terminal dues create 

financial transfers between delivery operators which, in turn, may cause distortionary 

spill-over effects (e.g., higher taxes to fund postal operators’ losses). 

Our analysis reveals that alternative systems like REIMS and bilateral agreements create 

many of the same distortions as the UPU system. We argue that an optimal and nondistortionary solution would require that terminal dues (i.e., the price for last-mile han-

 

2

 For a list of the 49 publications reviewed and the result of the screening, see Annex A3. 

3

 “First-mile activities” involve the sale to the original sender or shipper, collection in the country of origination, and 

transport (directly or by contract) to the country of destination from the origination country. “Last-mile activities” refer to 

intercity transport (if required), sorting, and delivery in the destination country. 

4

 Terminal dues higher than the costs are not likely to lead to distortions because operators can enter bilateral agreements to 

avoid too high prices. 

5

 Definitions of packet delivery and parcel delivery are provided in Box 1. 

6

 A definition of “letter post” is provided in Box 1. 
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11 

dling of cross-border letter post items) are set equal to the price for last-mile handling of 

domestic (and comparable) letter post items, adjusted for any cost differences between 

domestic and cross-border letters. In order to cope with political concerns, this solution 

could be complemented with an aid program for developing countries. 

In order to measure the magnitude of the identified distortions, we propose a two-step 

framework consisting of an initial screening where the likelihood and significance of different distortions are assessed and a subsequent quantification of the most significant 

distortions by means of economic modelling. 

Identifying distortions created by terminal dues 

In accordance with economic theory7

, prices have an important signalling function in all 

markets. For competitive markets to work, all economic agents (consumers and producers) must respond to appropriate price signals. Market failure occurs when the price signals incentivise agents to make decisions that lead to a loss of economic and social welfare. This happens when the additional benefits received by consumers from consumption 

of an additional unit of a product or service do not equal the marginal costs of producing 

another unit of that product or service. In economics terms: The marginal social benefit of 

consumption does not equal the marginal social cost of production. 

To analyze economic distortions created by existing terminal dues systems, we apply a 

value chain approach where we analyze the journey of a cross-border letter8 from sender 

to recipient. For each step of the value chain, we present key decision makers, decisions 

made, how decisions are affected by terminal dues, and how the influence of terminal 

dues in turn produces market distortions. 

By determining the prices that designated postal operators pay each other for last-mile 

handling of cross-border letter post items, terminal dues may distort price signals and 

influence decisions throughout the value chain. Terminal dues will have a direct impact 

on the decisions made by last-mile operators (what prices and conditions to offer for lastmile activities) and first-mile operators (which delivery operator to engage with). If low 

terminal dues spill over to low prices paid by senders for cross-border delivery, terminal 

dues may also have an indirect impact on the decisions made by senders (such as the decisions of which delivery operator to engage with and where to inject items) and recipients (e.g., from which country to order items online). 

Distortions created by the current UPU system for terminal dues 

By incentivising designated postal operators to discriminate between (i) letter post items 

of domestic and cross-border origin and (ii) letter post items delivered by designated and 

non-designated delivery operators when setting the prices for similar or identical lastmile delivery services, the UPU terminal dues system creates six types of market distortions: 

 Distortion of competition for last-mile handling of cross-border letter post items 

 

7

 See for example Varian (2002), Intermediate Microeconomics, p. 562 

8

 In order to ensure a broad and representative coverage of our analysis, we conduct the analysis for three types of letter mail: 

(i) business-to-consumer packets, such as e-commerce and mail order packets, (ii) bulk mail letters, such as direct mail or 

transactional bulk mail, (iii) single piece letters, such as birthday cards and postcards. 
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12 

 Distortion of competition for first-mile handling of cross-border letter post items 

 Distortion of demand for delivery within and outside the terminal dues system 

 Distortion of demand for domestic vs. cross-border delivery 

 Distortion of demand for cross-border delivery originating in transition vs. target 

countries 

 Financial transfers between delivery operators9

First, terminal dues may distort competition for last-mile handling of cross-border letter 

post items. This is the case when the terminal dues paid to the last-mile designated operator is so low that an as-efficient delivery operator cannot compete with the designated 

operator for last-mile handling of cross-border items. Distorted competition may hurt 

consumers in terms of reduced innovation which may lead to higher prices and lower 

quality of service in the long run. 

Second, terminal dues may distort competition for first-mile handling of cross-border 

letter post items. Because terminal dues are only available to designated operators, nondesignated operators have a competitive disadvantage (paying a higher price for last-mile 

activities in the destination country). In practice this could, for example, mean that a 

global integrator and competitor to the designated postal operator cannot offer competitive prices for a service where it collects and transports letters from the United States to 

the destination country for further last-mile handling by the local designated operator10. 

Similar to the case of last-mile activities, distorted competition in first-mile activities may 

hurt consumers in terms of higher prices, lower quality, and reduced innovation. 

Third, terminal dues may disproportionately increase the demand for delivery services 

covered by the terminal dues system. One example of this is an increased demand for 

delivery of packets delivered by the designated postal operators as a substitute for parcels 

with track and trace features delivered by global integrators. Excessive demand for delivery services covered by the terminal dues system will result in allocative inefficiency 

where too many cross-border items are sent as packets and too few items are sent as parcels, compared to a market with terminal dues set at competitive levels. This problem is 

particularly relevant for e-commerce and low value shipments below two kilograms, 

which can be sent as either packets or parcels. 

Fourth, terminal dues may lead to excessive cross-border traffic. Terminal dues may distort global bulk mail and e-commerce flows by increasing the demand for cross-border 

delivery relative to domestic delivery or domestic retail store sales. If cross-border delivery is priced disproportionately low compared to domestic delivery (as a result of low 

terminal dues) this may incentivize domestic bulk mailers to inject letters in foreign countries instead of injecting them domestically. Similarly, disproportionately low prices for 

cross-border delivery may incentivize e-shoppers to buy from (e-)retailers cross-border 

instead of buying from a domestic e-retailer or a local brick and mortar store. This leads 

to overall inefficiency and a waste of resources. 

 

9

 Transfers between delivery operators should only be considered a distortion as long as there are distortionary spill-over 

effects (e.g., compensation for postal operators’ losses funded by taxes). 

10 Such work-sharing is very common in many domestic mail markets. 
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13 

Fifth, terminal dues may lead to excessive cross-border traffic from specific countries with 

particularly low terminal dues (typically transition countries) relative to other countries 

(typically target countries). For example, instead of buying online from a target country, 

e-shoppers may have an incentive to buy online from a transition country (enjoying even 

lower delivery costs because transition countries pay lower terminal dues) although this is 

not efficient. If the decision to buy from the transition country is triggered by disproportionately low terminal dues, this creates distortions. 

Sixth, terminal dues may result in a transfer of money between designated operators 

within the UPU. The fact that terminal dues do not reflect the domestic price (or alternatively the costs) for last-mile activities implies that designated postal operators may lose 

money on inbound deliveries and earn money on outbound deliveries. Depending on the 

difference between the terminal dues and the cost for last-mile activities, as well as the 

composition of letter post flows, some designated postal operators will be net winners 

whereas others will be net losers. The transfer between designated operators may be distortionary if it spills over onto consumers (e.g., via increased taxes to fund the postal operator’s loss). 

Alternative systems create the same distortions 

A comparison of the UPU system with REIMS (administered by the International Post 

Corporation) and bilateral agreements reveals that these systems create the same type of 

distortions. Due to their discriminatory nature (third party operators not having access to 

the rates in practice), both REIMS and bilateral agreements may distort first-mile competition. However, if the terminal dues applied under REIMS and bilateral agreements are 

closer to the price for last-mile handling of domestic letter post items than the UPU rates, 

this may make them less distortionary with respect to competition for last-mile activities 

and distortions of global mail and trade flows. In this case, the transfers between participating operators are also likely to be smaller than under the UPU system. 

Designing a non-distortionary system for terminal dues 

To design a non-distortionary terminal dues system, we need to identify the underlying 

drivers for the identified distortions. Our in-depth analysis of the different distortions 

reveals three main drivers: 

 Terminal dues being discriminatory (towards third-party operators and between 

operators within the system); 

 Terminal dues deviating from the price of last-mile handling of domestic letter 

post items; 

 Terminal dues being lower than the long-run average incremental cost of domestic last-mile activities 

In order not to distort incentives for agents in the value chain, a non-distortionary system 

for terminal dues must be non-discriminatory (same rate applied for the same service 

across all delivery operators, also non-designated ones). Moreover, non-distortionary 

terminal dues would have to equal the price for last-mile handling of domestic letter post 

items11. Adhering to the principle “similar prices for similar services” will ensure that in-

 

11 Taking into account any additional costs associated with the handling of cross-border items. 
Final report 

14 

centives throughout the value chain are economically efficient because the price difference between last-mile handling of domestic letter post and last-mile handling of crossborder letter post will reflect the cost difference between these services. Last, but not 

least, in order to prevent foreclosure of as-efficient non-designated operators, nondistortionary terminal dues must be at least as high as the long-run average incremental 

cost12 of last-mile activities. 

In addition to eliminating the identified distortions, an ideal system for terminal dues 

should adhere to a number of sound regulatory principles13 for postal sector regulatory 

authorities and competition authorities. We find that a solution where terminal dues reflect the price for last-mile handling of comparable domestic letter post items would adhere to most of the requirements for postal tariffs specified by regulators in the United 

States and Europe. 

We conclude that the ideal solution would be a terminal dues system where rates equal 

the price for last-mile handling of comparable domestic letter products (i.e., the same 

prices charged for the same service – last-mile delivery – irrespective of the origin of the 

letter post item). This conclusion is based on a joint assessment of the impact on distortions and the fulfilment of sound regulatory principles. 

Need for a practical solution 

Despite its many benefits in terms of reduced distortions, implementation of the ideal 

solution may not be feasible. This is due to practical and political concerns. 

Practical concerns relate to the risk that the solution may be complex and burdensome to 

administer for designated postal operators and national authorities. For example, deciding which domestic postal products that are most similar to the inbound cross-border 

letter post mix (and thereby which prices to apply for last-mile handling of cross-border 

letter post) may not be straight forward. Political concerns regarding changes in the UPU 

terminal due rates primarily include the risk of reduced affordability of cross-border letter 

mail for some services or some postal operators, reduced profitability of designated postal 

operators, and reduced competitiveness of e-retailers in some countries. 

In order to cope with political concerns related to affordability of cross-border letter post 

and sustainability of universal service provision, a practical solution could be to complement the ideal solution with an aid program for developing countries. The practical solution would imply that all countries introduce terminal dues equal to the price for domestic 

last-mile activities. Alongside this, a compensation scheme could be introduced for developing countries in order to ensure affordability of cross-border letter post and contribute 

to a sustainable provision of universal services. 

 

12 The long-run average incremental cost is the (long-run) additional costs associated with the provision of a specific product. 

It is calculated as the average of all (fixed and variable) costs that a company incurs to produce a particular product (including product-specific fixed costs). If terminal dues are below the cost of last mile delivery, this means that an operator asefficient as the designated postal operator will not be able to compete. Although there is no firm consensus about what the 

relevant cost benchmark should be, recent case law and the guidelines from the European Commission suggest that the relevant cost benchmark should probably be the long-run average incremental cost. 

13 Sound regulatory principles are, for example, the provision of incentives for efficiency improvements, provision of incentives for high quality service provision, transparent pricing, and financial sustainability of universal service provision. 
Final report 

15 

Measuring distortions created by terminal dues 

In order to measure distortions, we propose a framework split into two steps. The first 

step is a qualification (or screening) step where the likelihood and significance of distortions are determined. The second step is a quantification step where the magnitude of the 

distortions is estimated. Only if distortions are identified as real and significant in the 

first step should one proceed to step two. 

Approaches to assess the likelihood of distortions occurring are different for the different 

distortions identified. Whereas distortions of competition for last-mile handling of crossborder letter post items can be assessed by comparing terminal dues to the cost of lastmile activities or through benchmarking with market segments without any distortions 

created by terminal dues, other distortions require other approaches. For example, to 

assess the likelihood of a distortion of global mail and trade flows or distortions of demand for packets versus parcels, it is important to first establish to what extent terminal 

dues charged for last-mile activities have an impact on the price paid by end-users. If 

terminal dues do not have any impact on end-user prices for delivery, there will most 

likely not be any significant distortions of demand. 

If terminal dues are found to have an actual impact on demand for delivery services, there 

are several options for how to assess the magnitude of the distortion in question. Simple 

comparisons of cross-border mail and trade flows and more advanced gravity models and 

difference-in-differences analysis can be used to estimate the impact of distortions on 

global mail and trade flows in terms of mail volumes and associated revenues. 

In order to measure the effects of distortions on the wider economy (in terms of effects on 

social welfare, prices of services, import and exports, output, wages, and GDP) a more 

comprehensive approach is needed. A tool for this could be a computable general equilibrium (CGE) model. 
Final report 

16 

Chapter 1 

Background and methodology 

1.1 Overview of international mail delivery 

In 2012, total worldwide letter post traffic amounted to 350.9 billion items. Of this, approximately one percent (or 3.7 billion items) was sent internationally.14 However, crossborder letter post volumes are expected to increase significantly. The expected growth is 

driven by cross-border e-commerce, growing by a rate of over 15 percent per year in Europe and almost 15 percent per year in the United States.15,16

 

According to estimates from the Universal Postal Union (UPU), 33 percent of all online 

trade is expected to take place cross-border by 2020.17 Items bought online are often below two kilograms in weight and can therefore be sent in the letter post flow (as small 

packets or “bulky letters”). In fact, the UPU estimates that 80 percent of mail items generated by e-commerce today weigh below 2 kilogrammes and are processed in the letterpost streams.18

 

The main international letter post flows are between industrialized countries (Table 1). 

Table 1 Top five international letter post flows (2011) 

 Flow % of total international flows

 Within Western Europe 43 

 Between Western Europe and North America 15 

 Between Western Europe and Eastern Europe & Central Asia 9 

 Between North America and Asia Pacific 8 

 Between Western Europe and Asia Pacific 8 

Note: Flows measured in kg 

Source: Universal Postal Union (2014),” Development strategies for the postal sector: An economic perspective”, Chapter 8: Global postal connectedness, p. 196

In 2011, 66 percent of all international letter post (by weight) was sent from Western Europe, 16 percent was sent from North America, and 12 percent was sent from the AsiaPacific region.19 A similar pattern is observed for the receipt of international letter post 

items (Figure 1). With Asia-Pacific exhibiting a strong growth in cross-border ecommerce, this pattern may change in the future. 

 

14 The Universal Postal Union (2013), “Development of postal services in 2012” 

15 European B2C E-commerce Report 2014, published during 2014 Global E-Commerce Summit, Barcelona 

16 eMarketer 2013, “US Retail Ecommerce: 2013 Forecast and Comparative Estimates” 

17 Universal Postal Union (2014), ”Fulfilling the global e-commerce promise”. Presentation by Marc Fardelli, chair, .post 

group, UPU Postal Operations Council, 24 March 2014 

18 Universal Postal Union website, ”Activities, Letter Post Development, About Letter Post Development”, 

http://www.upu.int/en/activities/letter-post-development/about-letter-post-development.html 

19 Universal Postal Union 2014, “The economic geography of international postal exchanges,” Development strategies for the 

postal sector: An economic perspective
Final report 

17 

Figure 1 International dispatch and receipt of letters, 2011 

Note: Mail flows (dispatches and receipts) are measured in numbers of kilogrammes of letters 

Source: Universal Postal Union 2014, “The economic geography of international postal exchanges,” Development strategies for the postal sector: An economic perspective

1.2 Terminal dues 

International delivery of letter post items involves multiple steps and charges. Notably, 

the delivery of a cross-border letter post item consists of outbound or first-mile activities 

(collection in the country of origination and transport to the country of destination) and 

inbound or last-mile activities (transport, sorting, and delivery in the destination country). As each delivery operator often is active only in one or a few countries, delivery operators have to cooperate in order to deliver cross-border. The cooperation implies that 

the first-mile operator in the originating country hands over the cross-border item to the 

last-mile operator in the destination country who delivers the item against a payment 

from the first-mile operator. 

In this report, the term “terminal dues” describes the rates paid by postal operators for 

last-mile handling of cross-border letter post items. Throughout the report, the term “letter post” is used to describe the delivery services subject to terminal dues. In addition to 

small and large letters, the definition of letter post also includes packets (or “bulky letters”) which often are used to deliver products bought online (Box 1). 

Other charges relating to international mail (which are outside the scope of this report) 

include “inward land rates,” which apply to last-mile handling of international parcel 

post, and “air conveyance dues” and “transit charges,” which apply to transportation of 

international mail which a postal operator provides for mail exchanged between two other 

postal operators.20

 

 

20 Air conveyance dues may also apply to long distance air transportation provided by a destination postal operator within its 

own country. 

0% 10% 20% 30% 40% 50% 60% 70%

North Africa & Middle East

Sub-Saharan Africa

South, Central America & Caribbean

Eastern Europe & Central Asia

Asia-Pacific

North America

Western Europe

Share of interantional receipts Share of international dispatches
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18 

Box 1 Definitions of letter post and parcel post 

Under the Universal Postal Convention, “letter post” is the international postal service 

for the conveyance of letters, postcards, printed papers, and small packets weighing 

up to 2 kg (with some exceptions). 

Generally, the UPU defines “letter post” as including letters and postcards, printed papers, and small packets. Letter post is also defined is also classified by format as including “small letters”(P), with a maximum weight of 100 grams (3.5 oz.) and maximum dimensions of 165 x 245 x 5 mm (6.50 x 9.6 x 0.2 in.); “large letters” (G), also 

called “flats”, with a maximum weight of 500 grams (17.6 oz.) and maximum dimensions of 305 x 381 x 20 mm (12.0 x 15.0 x 0.8 in.); and “bulky letters” (E), also referred to as “small packets” with a maximum weight of 2 kg (4.4 lbs.) and maximum 

combined dimensions of 900 mm (35.4 in.). 

The term “packet” or “small packet” is loosely but customarily equated with “bulky letters” (E) and thus refers to any letter post item that cannot be classified as a “small 

letter” (P) or a “large letter” (G). The maximum weight of packets may be increased to 

5 kg (11.0 lbs.) by agreement between postal operators. Packets are often used to deliver bulky items, such as small e-commerce items, which do not fit into a standard 

letter envelope. 

Parcel delivery, or “parcel post” service in UPU terminology, is used when the item to 

be sent does not fit within the requirements for letter post services or when the sender requires a value added service that is not available for letter post items. Parcels can 

thus be both small and large in size and weigh both more and less than letter post 

items. It should be noted that the outbound services of a national postal operator do 

not necessarily incorporate UPU terminology or correspond one to one with the underlying UPU packet and parcel services. 

Source: UPU (2013), Letter Post Manual, Conv. Art 14. 

There are multiple systems governing terminal dues payments between delivery operators. The system covering most delivery operators is prescribed by the UPU, i.e., by intergovernmental agreement, and is available to the designated operators (only) of all 192 

UPU members. Another system covering many operators is REIMS21, which is currently 

on its fifth iteration (REIMS V). REIMS is an inter-operator agreement which is administered by the International Postal Corporation (IPC). Postal operators who do not use UPU 

terminal dues or REIMS rates engage in bilateral terminal dues agreements. 

Whereas the UPU terms and conditions for terminal dues are public, this is not the case 

for REIMS and bilateral agreements. Information about these agreements in this report is 

thus based on secondary sources, such as existing literature and interviews with industry 

experts. Based on the information we have obtained, the main differences across the three 

terminal dues arrangements seem to be the level of remuneration, the use of quality incentives, and the use of parameters such as weight and format of mail items as determining factors for the rates paid (Table 2). 

 

21 REIMS stands for Remuneration of International Mails 
Final report 

19 

Table 2 Overview of systems for terminal dues 

 

 Public 

terms of 

agreement

Set rates as 

percentage of 

domestic rates

Rates 

subject to 

caps and 

floors

Rates 

based on 

quality of 

service

Distinction 

between 

different 

mail formats 

when setting 

rates

Rates 

available 

to both 

designated 

and nondesignated 

operators

 UPU Yes Partly1 Yes Partly2 No No

 REIMS No Yes No Yes Yes No3 

 Bilateral agreements No Unknown Unknown Unknown Unknown No

Note: 1UPU rates for target countries are in theory set based on their domestic single piece postage (list 

price). However, in reality, actual rates paid are in almost all cases subject to rate caps and floors. 

2UPU rates incorporate quality of service for participating target countries and for some transition 

countries that choose to participate. 

3REIMS II was, according EU Commission decisions, available to non-designated operators. The current version is not subject to the same exemption decision, as far as we can tell, nor is it in practice 

available to third parties. 

Source: Universal Postal Union, “About terminal dues and transit charges”; International Post Corporation, 

“Managing intercompany pricing”; Sorensen, Janet M., “International Terminal Dues White Paper”; 

Campbell, “Comment on REIMS II Terminal Dues Agreement” (1998) and “Evolution of the Postal 

Function in Long Distance Markets” (1997), Collected Papers on Specific Postal Policy Issues; Universal Postal Union 2013, “Statistics and Accounting Guide” 

The UPU terminal dues system 

The current UPU system for terminal dues (which is the main focus of this report) consists of a two-tiered system, where countries are divided into “target” and “transitional” 

countries.22 The target system and its applicable rates have traditionally been used for the 

exchange of letter post between designated operators in industrialized countries23, while 

the transitional system and its applicable rates apply to the exchanges to, from, and between developing countries.24 However, the “new” target countries that transitioned to the 

target system in 2010 and 2012 include several developing countries as defined by the 

United Nations. 

UPU members are divided into six groups (Table 3) based on the postal development 

index (PDI), which comprises a macroeconomic component (gross national income, GNI, 

per capita) and a postal-specific component (normal unit cost per letter based on full-time 

staff).25 Operators in groups 1.1, 1.2, and 2 belong to the target system. Operators in 

groups 3, 4, and 5 belong to the transition system but are expected to transfer to the transition system in the future.

 

22 An overview of the target and transition countries is available in Annex A. 

23 “Industrialized” and “developing” countries within the UPU context are based on a list determined by the United Nations

Economic and Social Council. It should be noted that many of the countries or territories considered to be developing are 

highly industrialized (e.g., Hong Kong, Singapore). 

24 UPU (2013) ”Statistics and Accounting Guide” 

25 Universal Postal Union (2007), 24th Congress, Doc. 19 Rev. 1, ”Terminal dues system: Joint Council of Administration and 

Postal Operations Council report” 
Final report 

20 

Table 3 Universal Postal Union groups 

 Group Number of countries Description

1.1 41 Countries in target system prior to 2010

1.2 13 Joined target system in 2010

2 22 Joined target system in 2012

3 39 Will join target system in 2016

4 54 Will apply transitional system for 2014-2017

5 49 Will apply transitional system for 2014-2017

Note: UPU members are divided into six groups based on the postal development index (PDI), which comprises a macroeconomic component (gross national income, GNI, per capita) and a postal-specific 

component (normal unit cost per letter based on full-time staff) 

Source: UPU 2013 “Statistics and Accounting Guide”

UPU terminal dues rates are determined based on multiple parameters: 

 per item and per kilogram rates (for operators in transition and target countries26) 

 domestic tariffs (for operators in target countries) 

 per item and per kilogram caps (for operators in target countries) 

 per item and per kilogram floors (for operators in transition and target countries) 

 quality incentive (for operators in target countries and operators in transition 

countries that choose to participate) 

For transition countries, the UPU terminal dues system prescribes rates per item and per 

kilogram.27 For mail flows below 75 tons, an average number of items per kilogram of 

mail28 is applied to these per item and per kilogram rates to develop one per kilogram rate 

for transition countries. These per item and per kilogram rates for the transitional system 

are equal to the floor of the target system for any given year.29 Any country in the transitional system may at any time opt to be treated as a target country.30

For target countries, the UPU terminal dues system prescribes methods of rate calculation based on domestic tariffs. The rates are based on 70 percent of the domestic tariff for 

a 20-gram priority small letter and a 175-gram priority large letter (see annex A.1). 

The following formula is used for calculating the terminal dues for a given mail flow under the UPU system: 

	
 = 		 ∗ 		 + 			 ∗ h		

In addition to the above, the target system also prescribes caps and floors (per item and 

per kilogram). The level of the floors and caps depend on group classification (1.1, 1.2 or 

2). From 2014 and onwards, counties in the target system is subject to a secondary cap 

where the rates applied for flows between countries in the target system in a given year 

shall not lead to an increase of more than 13 percent in the base terminal dues revenue 

 

26 A worldwide average number of items per kilogram may be applied to the per item/per kilogram rates in the transition 

system to determine one per kilogram rate for flows below 75 tons. 

27 Universal Postal Union (2012), Universal Postal Convention Articles 29, 30, and 31. See also Universal Postal Union (2013), 

”Statistics and Accounting Guide” 

28 The average number of items per kilogram is based on a UPU study of global mail traffic flow characteristics. 

29 Universal Postal Union (2013), ”Statistics and Accounting Guide” 

30 Universal Postal Union (2013), ”Statistics and Accounting Guide” 
Final report 

21 

before quality of service adjustment for a letter-post item of 81.8 grams, compared to the 

previous year. In practice, caps and floors are so close to each other that the terminal dues 

applied by target countries often is a fixed rate which is not aligned to the domestic price 

(as may appear at first sight). 

UPU data suggests that more than 80 percent of designated operators in group 1.1 will be 

subject to either caps or floors for intra-1.1 group letter flows between 2014 and 2017. For 

letter flows within groups 1.2 and 2, or between groups 1.1, 1.2, and 2, the share of operators subject to caps and floors are between 96 and 100 percent (Table 4). 

Table 4 Target countries constrained by UPU floors or caps 

Flows Cap/floor 2013 (%) 2015 (%) 2017 (%)

Intra-1.1 

(41 countries)

Cap (per kg/per item) 71/61 71/71 71/71 

Floor (per-kg/per-item) 17/17 17/17 17/17 

Cap or floor 88 88 88 

Intra-1.2, Intra-2, inter-1.1, 1.2, and 2 

(76 countries)

Cap (per-kg and per-item) 100 59 57 

Floor (per-kg and per-item) 100 39 39 

Cap or floor 100 98 96 

Note: The table shows the share of countries in the relevant group(s) constrained by UPU caps or floors in 

2013, 2015 and 2017. Total number of countries in groups 1.1, 1.2 and 2 are 76. Group 1.1 consists 

of 41 countries. 

Source: UPU tool: Terminal Dues Impact, 2012 

Together with the fact that transition counties pay a fixed terminal dues rate (often per 

kilogram), this means that the UPU system fails to be country-specific and linked to the 

cost of last-mile activities. It also fails to align the price for last-mile handling of crossborder letter post (i.e., the terminal dues) with the price for similar services (last-mile 

handling of domestic items). As we will show later in this report, this characteristic is an 

important driver of the distortions created by the current terminal dues system. 

In the UPU system, quality plays a role in the terminal dues owed between postal operators in two ways: through an adjustment of terminal dues rates according to quality of 

service (for operators in target countries with annual inward mail flows above 100 tonnes 

and for operators in the transition system that choose to participate), and through the 

Quality of Service Fund (distributed to operators in the transition system). 

The quality of service adjustment of terminal dues for target country operators involves a 

potential participation bonus corresponding to a five percent increase in base terminal 

dues rates, which the postal operator automatically receives for participating in the quality of service system. If the performance target is not achieved, a penalty factor is applied 

corresponding to one third of one percent reduction for each one percent below the performance target. The penalty factor will be applied such that the reduction is no greater 

than ten percent. A penalty of ten percent may not lead to remuneration less than 95 

percent of the base terminal dues rates or less than the terminal dues floor rates.31

 

31 Universal Postal Union (2013), ”Statistics and Accounting Guide” 
Final report 

22 

Depending on the country of origin, the country of destination, and the year, all designated postal operators except for those in Group 532 pay an additional fee of between two 

percent and 20 percent of terminal dues to a Quality of Service Fund for transition system 

operators.33 The fund is governed by the UPU, and distributed to postal operators in transition countries to improve postal services. 

The REIMS terminal dues system 

REIMS currently has 26 signatories, including all major European designated operators. 

Some of these operators have only signed parts of the agreement, e.g., REIMS East which 

includes a number of transitional elements applicable to postal operators in Eastern Europe. According to the IPC, only one-third of EU international mail volumes in 2009 were 

settled under REIMS.34

REIMS establishes terminal dues for the same standardized mail formats as the UPU 

(with the difference that REIMS also specifies different rates for different formats). 

REIMS is based on four principles:35

 Tariffs defined as a percentage of the domestic single piece letter postage36 

 Quality of service incentives with individual penalties and bonuses 

 Transitional period 

 Protection against remail 

The European Commission has earlier required REIMS terms and conditions to be made 

available to third parties. On 23 October 2003, the European Commission adopted a decision in case COMP/C1/38170 REIMS II, prolonging for an additional five years the exemption of the REIMS II Agreement from EC Competition Law. This decision was conditioned on the awarding to third parties of non-discriminatory access to REIMS II delivery 

terms and conditions.37 However, we have been unable to discern whether such a condition has been placed on the current REIMS V agreement. What we can observe is that to 

date only one non-designated operator (IMX38) has accessed the REIMS agreement. 

According to third party operators, it is virtually impossible for non-designated operators 

to access REIMS conditions. In 2011, Denis Cayet, CEO of IMX France, reported that 

“IMX France is the only private postal operator taking advantage of the Third Party 

Operator opportunity provided by the Commission in the REIMS II Renewal decision”. 

He also held that IMX, as the only private operator with access to REIMS rates, had 

gained a competitive advantage in the market for international mail.39 Similarly, the Free 

and Fair Post Initiative argued in 2012 that the awarding to third parties of non-

 

32 Group 5 countries are Least-Developed Countries as defined by the United Nations Economic and Social Council 

33 Country groups one through four must pay 20% of their terminal dues payment to Group 5 countries into the Quality of 

Service Fund for the Group 5 countries. 

34 Approximately one third were settled under alternative agreements such as UPU or bilateral agreements and approximately 

one third were injected directly in domestic networks. Source: IPC (2009), ”Trends and challenges in cross-border mail 

markets” 

35 IPC (2009), ”Trends and challenges in cross-border mail markets” 

36 Under REIMS II, 80 percent of the domestic price for a single-piece priority letter 

37 Baratta (2004), “The REIMS II exemption decision: enhancing competition in the cross-border mail market through third 

party access” 

38 IMX is a private pan-European mailing group of companies specializing in the distribution of periodicals, direct marketing, 

mail order, promotional material and business mail 

39 Denis Cayet, CEO IMX France, Presentation, WIK, 1 December 2011, ”How UPU Regulations Affect a Private Operator” 
Final report 

23 

discriminatory access to REIMS delivery terms and conditions was not respected in practice.40

 

Bilateral terminal dues agreements 

Some postal operators conclude bilateral agreements, often due to the operators’ international profiles and their ability to negotiate more beneficial rates bilaterally. Examples of 

operators relying on bilateral agreements include PostNL (NL), Swiss Post (CH), Austrian 

Post (AT), Itella (FI), Royal Mail (UK), Post Denmark (DK), Posten AB (SE), and the 

USPS.41 Conditions in bilateral agreements are confidential, but are likely closer to the 

price for last mile delivery of domestic letter post items than the UPU rates. In the United 

States, bilateral agreements are required by law to improve the net financial position of 

the Postal Service or enhance the performance of operational functions.42 Thus, one may 

expect rates negotiated in bilateral agreements to be higher than the UPU rates. 

1.3 Market distortions highlighted in existing literature 

The UPU system for terminal dues has been criticized for being distortionary in its nature. 

To create an overview of the distortions discussed in previous literature, we have reviewed 

49 documents that pertain to terminal dues.43 Of the sources reviewed, twenty-one 

brought up market distortions created by the current terminal dues system (Figure 2). 

Of those, 71 percent discussed terminal dues as a means of transferring money between 

designated postal operators. An equally large share discussed distortion of competition 

for first-mile and last-mile activities. Sixty-two percent discussed distortion of international mail flows, especially relating to remail. Twenty-four percent discussed terminal 

dues as inefficient “foreign aid,” touching on their role as subsidies and the resultant spillover effects. Last, but not least, 5 percent (one source) discussed the distortion of competition between e-retailers in transition and target countries. 

 

40 Free & Fair Post, “FFPI Contribution to the consultation on the ERGP Report on ‘Access’ to the postal network and elements of postal infrastructure” 

41 Walter Trezek, Ipostes, in correspondence 

42 Postal Regulatory Commission (2013), “Notice of United States Postal Service of Type 2 rate adjustment, and notice of filing 

functionally equivalent agreement,” filing ID 88294 

43 See Annex A3 for an overview of the sources and the results of the screening. 
Final report 

24 

Figure 2 Distortions identified in previous literature 

Source: Copenhagen Economics 

In what follows, we briefly describe each of the distortions identified in existing literature. 

Transfer of money between designated postal operators 

Several publications emphasize that terminal dues paid to target countries do not cover 

the cost of last-mile activities and that this (in combination with the structure of bilateral 

mail flows) creates winners and losers among the participating postal operators.44

The cost of last-mile handling of cross-border letter post items is often approximated in 

previous literature as a share (normally 70-80 percent) of the list price for domestic (endto-end) delivery of single piece letter items. For some postal operators, such as the USPS, 

there is a marked difference between the price for domestic letter delivery and the 

amount of compensation received from the UPU terminal dues system based on the cap. 

Figure 3 shows the price for domestic first class delivery of a normal-shaped letter compared with the terminal dues received for a cross-border letter sent from Denmark. As the 

diagram shows, there is a marked difference between domestic delivery prices and terminal dues, primarily for items weighing more than 25 grams. This is also the case if the 

domestic postage is reduced by 20-30 percent. 

 

44 The “winners” often referred to include Royal Mail, USPS, and Correos, while “losers” include Post Italiane, Norway Post, 

Japan Post, Canada Post, An Post (Ireland), Itella (Finland), and Post Denmark. Cf. Campbell, ”UPU terminal dues: winners and losers” 

0 10 20 30 40 50 60 70 80

Distortion of competition between e-retailers in

transition and target countries

Inefficient “foreign aid” subsidy, and spillover 

effect

Distortion of international mail flows (as with

remailing)

Distortion of competition for first-mile and lastmile delivery

Transfer of money between designated postal

operators
Final report 

25 

Figure 3 Terminal dues vs. domestic rates, United States 

Note: Prices from USPS for normal-shaped letter, using First Class shipping when 300 grams or under, and 

using priority shipping when over 300 grams. Used First Class Mail rates in certain instances, instead

of priority, because although the UPU states that UPU terminal dues are calculated with priority rates, 

the amounts it cites as examples for US domestic rates are for First Class. 

Source: United States Postal Service website; Universal Postal Union 2013, “Statistics and Accounting Guide” 

If terminal dues are lower than the actual cost for last mile delivery, this implies that 

postal operators (compared to a situation where terminal dues cover the cost of last-mile 

activities) lose money on inbound letters and gain money on outbound letters (Box 2). 

0

2

4

6

8

10 20 25 50 75 100 125 150 175 200 300 400 500 600 700 800 900 1000

SDR

Weight of letter item (grams)

US domestic rate (in SDR, exclusive of VAT) (2014) UPU terminal dues (2014)
Final report 

26 

Box 2 Gains and losses created by below-cost terminal dues 

In this example, we consider two operators, A and B. 

A is a high-cost operator with a cost of last-mile activities of 1.0. B is a low-cost operator with a 

cost of last-mile activities of 0.6. The terminal dues on all transactions between A and B are set at 

0.5 (i.e., below cost for both operators). This implies that operator A loses 0.5 (0.5-1.0) on every 

inbound item and gains 0.1 (0.6-0.5) on every outbound item, compared to a situation where the 

terminal dues would be equal to the cost of the activities performed. Similarly, operator B loses 

0.1 (0.5-0.6) on every inbound item and gains 0.5 (1.0-0.5) on every outbound item, compared 

to a situation where the terminal dues would equal the cost of the activities performed. 

Losses and gains per item in relation to inbound and outbound activities 

A B

Loss per item on inbound activities -0.5 -0.1

Gain per item on outbound activities 0.1 0.5

If the two bilateral flows between A and B are symmetrical, this implies that the high cost operator A achieves a net loss of 400 whereas the low cost operator B achieves a net gain of 400. 

Transfer from country A of country B

Balanced flow: 1,000 items from A to B, and 1,000 items from B to A 

A B

 Total loss on inbound activities -500 -100 

 Total gain on outbound activities 100 500 

Net gain/loss -400 400 

In previous literature, this mechanism is often referred to as a transfer or subsidy between postal 

operators where money is transferred from the high cost to the low cost operator.

Source: Copenhagen Economics 

When assessing the effect of the terminal dues system on designated postal operators’ 

financial positions, one needs to compare the current situation against a counterfactual 

situation with an alternative set of terminal dues that provides a demonstrable improvement over the current system. The difference between the two situations should be considered an effect of the current terminal dues system. 

A set of alternative terminal dues in the counterfactual which would reduce the losses 

(gains) on inbound (outbound) deliveries could for example be defined by cost-based 

terminal dues or terminal dues equal to the prices of similar domestic delivery services. In 

practice, previous studies have used a counterfactual terminal dues system with terminal 

dues set at a percentage (typically 70-80 percent) of the domestic price of end-to-end 

delivery of a single-piece letter, assumed to represent the cost of last-mile handling of 

cross-border letter post items.45

 

 

45 The assumption that the cost of last-mile delivery of cross-border mail can be approximated by 70-80 percent of the price 

for domestic end-to-end delivery of single piece letters is not necessarily correct. In a study about postal operators’ pricing 

behaviour, conducted on behalf of the European Commission in 2011, we found that single piece items (on average) were 

priced over 45 percent higher than transactional bulk mail and bulk mail was priced almost 50 percent higher than direct 

mail. This suggests that a 20 percent discount on single piece tariffs may not be enough to reflect the cost of last-mile delivery of cross-border letters. 
Final report 

27 

A change in the terminal dues system would influence the financial position of postal 

operators, given their bilateral mail flows, via two channels: import and export of letter 

post. 

For import volumes, the effect (for a specific postal operator) would equal the change in 

terminal dues charged times the volume of inbound cross-border letter post items. The 

effect will be positive (i.e., an increase in the net revenue) if current terminal dues are 

below cost or domestic prices. 

For export volumes, the effect would equal the change in the weighted terminal dues for 

the export basket (i.e., containing a mix of export countries) times the volume of outbound cross-border letter post items. In the counterfactual situation, terminal dues will 

increase in some countries and decrease in others. This means that the net effect on the 

export side will depend on the mix of countries in the export basket. However, since most 

international mail volumes are sent to industrialized countries (cf. chapter 1) and since 

terminal dues in these countries often are capped, the weighted terminal dues for export 

mail will most likely increase for most countries in the counterfactual. 

The net effect for a postal operator will thus to a large extent depend on whether the operator is a net importer or a net exporter of mail (although the relative change in terminal 

dues for import and export mail also will have an impact) (Table 5). 

 Table 5 Effect of changes in terminal dues 

Net exporter Net importer 

Relative increase in terminal dues (import terminal dues increase more than export terminal dues) Net effect unclear Net gain 

Relative decrease in terminal dues (import terminal dues increase less than export terminal dues) Net loss Net effect unclear 

Source: Copenhagen Economics 

Net-importing operators who lose money on delivery of inbound mail may try to recover 

these losses somehow, e.g., via rebalancing of domestic and international tariffs, via lower 

profit, or via compensation from the government (something which may spill over in 

higher taxes to the detriment of consumers). Higher tariffs may not be possible due to a 

number of factors, such as: competition for outbound international mail and esubstitution; competition for domestic mail by consolidators, local or regional delivery 

operators, and e-substitution; or regulation of letter mail tariffs. 

Distortion of competition between designated and non-designated operators 

Because UPU terminal dues are only available to designated postal operators, nondesignated operators (including extraterritorial offices of exchange - ETOEs - run by designated operators) pay higher rates for last-mile handling of cross-border mail with a 

designated operator. 

As a result, designated postal operators may use prices based on low terminal dues to 

exclude competitors from the markets for outbound (first-mile) and inbound (last-mile) 

delivery of letter post. Although the distortions of competition in first-mile and last-mile 
Final report 

28 

activities are very different, previous literature often does not distinguish between the 

two. 

For first-mile handling of outbound letter post items, the risk is distorted competition 

between the designated operator and multinational, national, and regional carriers collecting, consolidating, and transporting bulk mail. This risk is only relevant for products 

subject to (potential) competition, such as bulk letters and single-piece packets (often 

used for e-commerce). 

Similar to other non-designated operators, ETOEs run by designated operators do not 

have access to UPU terms and conditions when competing for cross-border mail delivery 

(Box 3). The UPU system may thus distort competition between ETOEs and designated 

operators. 

Box 3 ETOEs: Description and implications 

An extraterritorial office of exchange (ETOE) is defined as a facility operated by a designated postal operator in the territory of another country. An ETOE is a special kind of International Mail Processing Centre (IMPC) with the purpose of processing mail items under the 

set specifications of international mail exchange. The majority of ETOEs are operated by 

European postal operators. One function of ETOEs is increasing mail volumes of designated 

postal operators through participation in the markets of foreign territories. In addition to 

gathering mail destined for the home country, ETOEs are also competing for cross-border 

volumes destined for other countries. For example, an ETOE owned by the designated operator in the Netherlands may compete for cross-border volumes between the UK and the 

United States via its ETOE in the UK. 

The UPU Congress resolution C6/2012 reported 141 known ETOEs worldwide in 2011, up 

from 110 in 2008. Because ETOEs are affiliated with designated operators, they could in 

principle benefit from the service provisions and terminal dues rates available to UPU members. Under 2004 and 2012 UPU resolutions, however, ETOEs are considered strictly commercial entities, and are not covered by universal service provisions available to designated 

operators – including terminal dues rates. Nevertheless, the UPU resolutions instruct member states to respect national policies of individual countries, e.g., legal requirements of 

non-discrimination. 

UPU members disagree about policy towards ETOEs. Some designated operators operate 

ETOEs, and they have been the topic of ongoing discussion since 2007. The current discussions regard new standards for IMPC codes. 

Note: ETOEs operate directly in foreign markets, and compete for the volumes of outbound and inbound 

mail. The illustration shows an example where country A handles outbound mail to country D from 

three different origin countries: A, B, and C. Sometimes, mail items for country Dare consolidated in 

country A instead of sent directly from B or C to D. 

Source: Definition by UPU Congress resolution C6/2012. Leong, Bahar & Papakrivopoulos (2008) 

For inbound mail, the risk is of distorting competition between the designated operator 

and those operators delivering bulk letters or small packets. As with the outbound mail 

scenario, this risk is only relevant for products subject to (potential) competition. 
Final report 

29 

The UPU terminal dues system has been analysed from a competition law point of view 

with the conclusion that it produces price fixing without any pro-competitive elements 

which could outweigh the negative effects (Box 4). 

Box 4 Compatibility of UPU terminal dues with EU competition law

By determining the rates paid between designated postal operators for last-mile handling of cross-border letter post items, the UPU system could be thought of as a price 

fixing agreement, which infringes EU competition law. 

EU competition law, article 101, prohibits concerted practice between undertakings, 

prohibits price-fixing, and prohibits anti-competitive agreements. EU competition law 

allows for exemptions when pro-competitive elements are present and substantial in a 

given agreement, and when a significant part of benefits produced by a given agreement are passed on to consumers. 

REIMS II was granted exemptions by the European Commission, based on procompetitive elements (quality and efficiency incentives), better cost-alignment than 

the UPU rates (no caps or floors), and the condition that they incorporate nondiscrimination between all operators. 

However, without non-discrimination towards third-party operators and proper costalignment (primarily due to caps and floors) the UPU system may not produce the 

same pro-competitive elements. 

Source: Geradin (2012), EU Competition law, articles 101 and 102 

Distortion of international mail flows 

UPU terminal dues are set differently for target countries than for transition countries. 

The aim is to progressively incorporate the developing and least developed countries into 

the target system that already applies to industrialized countries.46 

These differences in rates between countries lay the groundwork for the possibility of 

arbitrage through injection of mail in a transition country in order to capitalize on low 

terminal dues. Arbitrage could come in the form of “remail” (Box 5) where mail items or 

data are transported across the border for injection in a foreign country. 

 

46 UPU (2014), “About terminal dues and transit charges,” UPU website, http://www.upu.int/en/activities/terminal-duesand-transit-charges/about-terminal-dues-and-transit-charges.html 
Final report 

30 

Box 5 Remail: Description and implications 

“Remail” is letter post items which are posted in a country other than the country 

where the mailer “resides”. The sender might physically send the mail to a second 

country for posting using a private operator or ETOE or “cause it to be posted” by 

transferring the electronic data from which the mail is prepared. Where a company is 

considered to reside is matter of judgement for postal officials. A large multinational 

company like Citibank (in one famous case in Europe) could be deemed to reside in 

almost every country in the world. 

There are two main types of remail: ABA and ABC. In ABA remail, mail originating in 

country A is injected in country B, and sent back to A. In ABC remail, mail originating 

in country A is posted in country B, and sent to country C. In the example below, 

country B is a transitional country that enjoys lower terminal dues rates, while countries A and C respectively are target countries. 

Illustration of ABA and ABC remail 

Under article 28 of the 2012 Universal Postal Convention, UPU postal operators are allowed to confiscate and detain what appears to be ABA and ABC remail, in order to 

demand additional compensation. They may also refuse to deliver the mail items. The 

stated purpose of article 28 is to prevent mailers from taking advantage of the terminal dues system. 

Note: Remail refers to the situation when mail from one country is injected in another by a private or a 

foreign-designated operator 

Source: Ghosal 2002, Joint Cases C-147/97 and C-148/97, Deutsche Post AG v. Gesellschaft für Zahlungssysteme mbH (GZS) and Citicorp Kartenservice GmbH, and USPS (2012) report: EN-WP-12-001 

Inefficient foreign aid subsidy 

The two-tier structure of the UPU terminal dues system and the quality of service fund 

(with contributions calculated based on terminal dues) aims at supporting less developed 

countries in their provision of international delivery of letter post items. 

Whereas the quality of service fund directly finances projects aimed at improving the 

quality of inbound letter-mail flows, the (generally) lower terminal dues rates given to 

transition countries come with no stipulations that the savings on outbound mail are used 

to improve postal delivery in the country. The two-tiered system has therefore been criticised for creating potential for arbitrage without effectively helping those countries who 

need it the most. 

A

(target country)

B

(transition country)

A

(target country)

B

(transition country)

C

(target country)

@

@

ABA ABC
Final report 

31 

Distortion of competition between e-retailers in transition and target 

countries 

Restrictive terminal dues caps on cross-border deliveries to target countries and different 

terminal dues for letter post items posted in developed (target) and developing (transition) countries make it possible for e-retailers to offer low-cost delivery from transition 

countries to target countries. This allows for a distortion of competition between retailers 

in target and retailers in transition countries and may also have potential implications for 

the decisions of where to locate warehouses or production for e-commerce. 

1.4 An economic framework for identifying distortions 

created by terminal dues 

To determine whether and how terminal dues distort decisions of market players, we 

must first establish which ideal state is being deviated from and thus what constitutes a 

distortion of this state. In accordance with economic theory47, prices have an important 

signalling function in a market. In a free market, prices rise and fall to reflect scarcities 

and surpluses. If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand. Similarly, if there is 

excess supply in the market, the price mechanism will help to eliminate a surplus of a 

good by allowing the market price to fall. 

For competitive markets to work, all economic agents (consumers and producers) must 

respond to appropriate price signals in the market. Economic theory states that rational 

decision-makers weigh the marginal benefit received from an option with its marginal 

cost, including the opportunity cost. Market failure occurs when the signalling and incentive functions of the price mechanism fail to operate optimally leading to a loss of economic and social welfare. For example, consumer preferences for goods and services may 

be based on imperfect information about the costs and benefits of a particular decision to 

buy and consume a product. 

According to standard economic theory, the ideal state is a situation where allocative efficiency is maximized. In this situation, social surplus and economic efficiency are maximized and there is no deadweight loss. In this situation, the additional benefits received by 

consumers from consumption of an additional unit of a product or service should equal 

the marginal costs of producing another unit of that product or service. In economics 

terms: The marginal social benefit (MSB) should equal the marginal social cost (MSC). 

This also means that the additional benefit received by consumers from switching its consumption from one product to another should equal the additional (marginal) costs of 

producing the product to which the consumer switches. 

The incentives that producers and consumers have can be changed by interventions in the 

market, for example by government intervention in terms of taxes or subsidies that 

changes prices. Interventions like this distort price signals in the market and imply that 

prices no longer reflect scarcities or surpluses of resources. 

 

47 See for example Varian (2002), Intermediate Microeconomics, p. 562 
Final report 

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According to the economic framework outlined above, economic agents make economically inefficient decisions when price differences between two products or services do not 

correspond to the actual cost differences for the same alternatives. This may result in 

allocative efficiency, i.e., excessive demand for some services and too low demand for 

others. 

For example, a distortion will occur when the difference between the terminal dues (i.e. 

the price for last-mile activities) for a cross-border letter and the price for last-mile handling of a domestic letter is greater (or smaller) than the difference in actual costs for lastmile handling of domestic and cross-border letters. In this situation, decisions made by 

agents in the value chain are based on price signals that differ from the actual costs incurred. In this way, terminal dues that are lower than the domestic price for last-mile 

activities will increase the incentive for e-shoppers to buy cross-border instead of domestically (Box 6) although this is not efficient. 

Box 6 Market distortion leading to allocative inefficiency 

Market distortions leading to allocative inefficiency occur when the price-cost relationship for last-mile activities is different for domestic and cross-border letters. 

Example:

Mark-up on cost for domestic letters: 0.3 

Mark-up on costs for cross-border letters: -0.2 

Provided that this is the only price that matters for the mailer, there will always be 

a preference for cross-border delivery (although the cost of providing the two services 

is the same) 

Cost and price for last-mile handling of letters in country A 

Note: Numbers are hypothetical 

Source: Copenhagen Economics 

Terminal dues are distortionary when they have a negative impact on allocative efficiency, 

e.g., by incentivizing buyers of delivery services to buy too little or too much of certain 

services compared with an optimal situation where a hypothetical “social planner” knows 

the true costs of delivery. Terminal dues can also be distortionary through incentivizing 

buyers of delivery services to buy delivery from a less-efficient delivery operator or triggering inefficient printing or enveloping of hybrid mail items or magazines in transition 
Final report 

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countries (productive inefficiency48). Last, but no least, terminal dues may create distortions by preventing “as-efficient” competitors from competing in the cross-border delivery markets (dynamic inefficiency49). 

 

48 Productive efficiency is efficient provision of services, and is achieved when the output is produced at minimum average 

total cost (ATC). The operator with the lowest costs should be the one to provide services. 

49

 Dynamic efficiency describes an economy with an appropriate balance of short run concerns (static efficiency) and long run 

concerns (technological progress and innovation). Dynamic efficiency is encouraged by effective competition leading to new 

processes and new products.
Final report 

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Chapter 2 

Distortions created by current 

systems for terminal dues 

2.1 Summary of findings 

Our review of the UPU system for terminal dues shows that the current system of terminal dues could distort decisions made by agents in the postal delivery value chain. The 

suboptimal decisions may result in allocative, productive, and dynamic inefficiencies 

throughout the value chain. 

The distortions detected can be grouped into six main categories (Table 6). 

Table 6 Overview of distortions created by terminal dues 

 Distortion Allocative 

inefficiency

Productive 

inefficiency 

Dynamic

inefficiency 

Competition for last-mile handling of cross-border letter post items x x 

Competition for first-mile handling of cross-border letter post items x x 

Demand for delivery products within and outside the scope of the 

terminal dues system x 

Global mail and trade flows, domestically vs. cross-border x (x) 

Cross-border mail and trade flows, target vs. transition country 

origin x (x) 

Transfer between delivery operators (spill-over to other services) (x) 

Note: Parentheses denote potential inefficiencies 

Source: Copenhagen Economics 

First, terminal dues may distort competition for last-mile handling of cross-border letter 

post items. This is the case when the terminal dues paid to the last-mile designated operator is lower than the cost of last-mile activities. In this situation, an as-efficient delivery 

operator cannot compete with the designated operator for last-mile activities. Although 

there is no firm consensus about what the relevant cost benchmark should be (how large 

share of joint and common costs should be included), recent case law50 and guidelines 

from the European Commission51 suggest that the relevant cost benchmark should probably be the long-run average incremental cost. 

Second, terminal dues may distort competition for first-mile handling of cross-border 

letter post items. Because terminal dues are not available to non-designated operators, 

non-designated operators have a competitive disadvantage (paying a higher price for lastmile activities in the destination country) compared to the designated operator. In practice this could mean that a competitor to the designated operator cannot offer competitive 

prices for a service where it collects and transports letters to the destination country for 

further last-mile handling by the local designated operator. Such work-sharing is very 

common in many domestic mail markets, e.g., in the United States. Distorted competition 

 

50 C-209/10, Post Danmark 

51 European Commission (2009), Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC

Treaty to abusive exclusionary conduct by dominant undertakings 
Final report 

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for first-mile handling of cross-border letter post items creates dynamic inefficiency and 

can also lead to productive inefficiency if the competing operator is more efficient than 

the designated operator. 

Third, by reducing the price paid by consumers for cross-border delivery of letter post 

items below the level that would emerge in a free market without intervention, terminal 

dues may disproportionately increase the demand for delivery services covered by the 

terminal dues system. One example of this is an increased demand for delivery of packets 

(often with a registry service) delivered by the designated operators as a substitute for 

parcels with track and trace features delivered by global (non-designated) operators. Disproportionately increased demand for delivery services covered by the terminal dues system will result in allocative inefficiency where too many cross-border items are sent as 

packets and too few items are sent as parcels. This problem is particularly relevant for ecommerce and low value shipments below two kilograms, which can be sent as either 

packets or parcels. 

Fourth, terminal dues may lead to excessive cross-border volumes. Terminal dues may 

distort global bulk mail and e-commerce flows by increasing the demand for cross-border 

delivery relative to domestic delivery. If cross-border delivery is priced disproportionately 

low compared to domestic delivery (as a result of low terminal dues) this may incentivize 

bulk mailers to inject letters in foreign countries instead of injecting them in the destination country. Similarly, disproportionately low prices for cross-border delivery may incentivize e-shoppers to buy from cross-border retailers instead of domestic ones. Distortion 

in demand for cross-border delivery relative to domestic delivery creates allocative inefficiencies and can also lead to productive inefficiencies—for example, if letters are injected 

in countries with less-efficient printing facilities leading to a waste of resources. 

Fifth, terminal dues may lead to excessive cross-border delivery from transition countries. 

Terminal dues may increase the demand for cross-border delivery from certain countries 

with particularly low terminal dues (typically transition countries) relative to other countries (typically target countries). For example, instead of buying online from another target country (which, due to low terminal dues, may be preferred to buying from a domestic 

supplier), e-shoppers in target countries may have an incentive to buy online from a transition country (thereby enjoying even lower mailing costs due to even lower terminal 

dues). If the decision to buy from the transition country is triggered by disproportionately 

low terminal dues, this creates allocative inefficiency. It could also create productive inefficiencies if production is carried out less-efficiently than would have been otherwise. 

Sixth, terminal dues may result in a transfer of money between designated operators 

within the UPU. The fact that terminal dues do not reflect the price for last-mile activities 

implies that postal operators may lose money on inbound deliveries and earn money on 

outbound deliveries. Depending on the difference between the terminal dues and the cost 

for last-mile activities, as well as the composition of letter post flows, some postal operators will be net winners whereas others will be net losers. The transfer between designated operators in the UPU may be distortionary if it spills over onto consumers (e.g., via 

increased taxes to fund the postal operator’s loss). 
Final report 

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An overview of the drivers of the identified distortions is provided in Table 7. 

Table 7 Overview of distortions and their underlying drivers 

 Distortion Driver of the distortion Comment

Competition for last-mile 

handling of cross-border letter 

post items 

Terminal dues < last-mile cost 

Non-designated operators in inbound 

market may face predatory (below cost) 

pricing

Competition for first-mile 

handling of cross-border letter 

post items 

Discrimination against nondesignated operators 

Non-designated operators in the outbound 

market pay more for last-mile activities 

than designated operators

Demand for delivery products 

within and outside the terminal 

dues system 

Terminal dues < Price of domestic last-mile activities Distorted price signals may create inefficient distribution of service products

Too much cross-border traffic Terminal dues < Price of domestic last-mile activities 

May increase the relative profitability of 

injecting mail in a foreign country

Too much traffic from transition countries Discrimination against operators in target countries 

May increase the relative profitability of 

injecting cross-border mail in a transition 

country

Transfer between delivery 

operators (spill-over to other 

services) 

Terminal dues < Price of domestic last-mile activities 

Non-alignment of compensation to costs 

creates winners and losers among designated operators

Source: Copenhagen Economics 

An assessment of the REIMS V and bilateral agreements suggests that the these systems 

(as far as the terminal dues applied are closer to the price for last-mile handling of domestic letter post items) may be less distortionary than the UPU system with respect to competition for last-mile activities and distortions of global mail and trade flows. Moreover, 

the transfers between participating operators under these systems are generally understood to be smaller than under the UPU system. Nevertheless, due to their discriminatory 

nature (third party operators not having access to the rates) competition for first-mile 

activities may still be distorted under the alternative agreements. 

2.2 Framework for analysis: Value chain approach 

In order to analyze distortions created by existing terminal dues systems, we apply a value 

chain approach where we analyze the journey of a letter post item from sender to recipient. For each step of the value chain, we present the key decision makers, the decisions 

made, how these decisions are affected by terminal dues, and how the influence of terminal dues in turn produces market distortions. In order to ensure a broad and representative coverage of our analysis, we conduct the analysis for three types of letter post items: 

1. Business to consumer (B2C) packets, such as e-commerce or mail order packets 

2. Bulk mail letters, such as direct mail or transactional bulk mail 

3. Single piece letters, such as birthday cards and postcards 

Figure 4 provides a stylized and simplified example of the delivery value chain of bulk 

mail letters from sender to recipient where a business sender (amongst other things) decides how many direct mail items to send, how to send the items from country A to country C, and where to inject the letters into the delivery chain.52 The first-mile operator decides what price to offer for end-to-end delivery, as well as what delivery operator to en-

 

52 In reality, the value chain consists of more decisions (cf. chapter 2.3). 
Final report 

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gage with for last-mile activities in the destination country. Similarly, the last-mile operator decides what delivery services to offer and what price it should charge for these services. In this example, the recipient is a passive agent whose only task is to receive the 

letter (i.e., the recipient does not influence the delivery process). 

Figure 4 Journey of a letter: Stylized example (bulk mail) 

Source: Copenhagen Economics 

As the diagram above shows, the decisions made by the agents in the value chain are interlinked. For example, the sender’s decision of where to inject its direct mail items (in 

country A, B, or C) will depend on the available delivery options and their corresponding 

prices (determined by first and last-mile operators in the different countries). Similarly, 

the first-mile operator’s decision concerning which operator to engage for last-mile activities will depend on the different delivery options and prices offered by last-mile operators. 

Terminal dues enter this chain of decisions because terminal dues determine the payment 

between postal operators for last-mile handling of cross-border letters. In this way, terminal dues will have a direct impact on the decisions made by last-mile operators (what 

prices and conditions to offer for last-mile activities) and first-mile operators (what delivery operator to engage with and what prices to charge for cross-border delivery). If low 

terminal dues are reflected in low prices paid by senders for cross-border delivery, terminal dues may also have an indirect impact on the decisions made by senders (such as the 

decisions of which delivery operator to engage with and where to inject items). If delivery 

is an important input for the sender, terminal dues may also affect the prices charged for 

the senders’ own products or services. This may for example be the case for e-commerce, 

where the level of terminal dues may affect the prices charged by e-retailers for delivery 

(or the product price in case delivery is offered for free). As a result, the level of terminal 

dues may have an impact on e-shoppers’ decisions regarding from which country to order 

items online. Figure 5 illustrates how terminal dues affect the prices and decisions along 

the value chains for bulk mail letters and B2C packets. 

Last mile 

delivery operator

First mile 

delivery operator Decision makers Sender Recipient

Decisions

How many items 

to send?

How to send 

direct mail from A 

to C?

Where to inject 

mail?

What price to 

charge for end-toend delivery?

Which operator to 

use for last mile 

delivery?

What price to 

charge for last 

mile delivery?
Final report 

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Figure 5 Effects of terminal dues on prices in the value chain 

Bulk mail letters

B2C packets

Note: End-to-end delivery means the delivery from sender to recipient 

Source: Copenhagen Economics 

According to standard economic theory, the competitive situation will determine the extent to which a supplier in the value chain passes on a cost increase/reduction (e.g., due to 

terminal dues which are higher/lower than the price for last-mile handling of domestic 

letter post items) to its customers in terms of a higher/lower price. 

Whereas fierce competition will imply zero pass-on of a price increase from a firm to its 

customers (full pass-on of a price reduction)53, a monopoly situation (with constant marginal cost and linear demand) will imply a 50 percent pass-on to customers.54 The 50 percent outcome is the result of a trade-off made by the monopolist wanting to maximise its 

margin (by increasing the price) while at the same time minimising the loss of sales (due 

to the increase in price). Whether the actual outcome is 50 percent pass-on, or slightly 

higher or lower, depends on factors such as the price sensitivity of customers (determining the shape of the demand curve).55

 

Thus, there is only a small likelihood that the impact of terminal dues at the level of lastmile delivery will be fully passed-on to agents further down the value chain. 

 

53 With perfect competition, individual firms have no scope to pass through firm-specific cost changes. This implies that the 

firm-specific pass-on rate will be zero. 

54 When marginal costs are constant, the pass-on rate will be determined by the ratio of the slope of demand to the slope of 

marginal revenue. In case of linear demand, the slope of demand is half the slope of marginal revenue. In this case, the monopoly pass-on rate is 50 percent. 

55 In an oligopoly situation with Bertrand (price) competition between differentiated goods and linear demand, firm-specific 

pass-on rates decreases as the number of firms in the market increases (converging to the 50 percent monopoly pass-on 

when the number of firms get large). 

Last mile 

delivery operator

First mile 

delivery operator Decision makers Sender Recipient

Price decisions

Price for lastmile delivery in 

destination 

country

Price for crossborder delivery 

(end-to-end)

Price of products 

or services 

provided

Terminal dues

E-shopper First mile 

delivery operator E-retailer Last mile delivery operator

Price for crossborder delivery 

of e-commerce 

product

Price for crossborder delivery 

(end-to-end)

Price for lastmile delivery in 

destination 

country

Terminal dues

Decision makers

Price decisions
Final report 

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2.3 Distortions created by terminal dues 

In the following, we present the result of our value chain analysis. We focus on one step at 

a time in the value chain, beginning with the last-mile phase where terminal dues have 

the most direct impact. 

Distortions of decisions in the last-mile phase 

When analysing potential distortions in the last-mile phase, we need to take into account 

that there are two types of last-mile operators: designated operators (with access to UPU 

terminal dues) and non-designated operators (without access to UPU terminal dues). 

The key decisions for these operators, related to terminal dues, are: 

 Which last-mile options to offer for domestic and incoming cross-border mail 

 What prices and conditions to offer for last-mile activities 

Our assessment of the current terminal dues system reveals two main distortions in relation to last-mile operators’ decisions: 

 Distorted competition for last-mile handling of cross-border mail 

 Under-compensation of last-mile handling of inbound cross-border mail 

Distortion of competition for last-mile handling of cross-border mail 

Expectations about profitability drive a non-designated operator’s decision to compete for 

last-mile handling of cross-border mail. One determinant of expectations about profitability is the price that the designated operator charges for the competing service, i.e., lastmile handling of cross-border letter post items. Since terminal dues determine the price 

paid by foreign designated operators for last-mile activities, this price will also have an 

impact on how much a non-designated operator can charge for a last-mile service. 

If terminal dues are less than the long-run average incremental cost56 for last-mile activities, an as-efficient operator with the same costs as the designated operator will not be 

able to compete in a profitable way with a designated operator for last-mile handling of 

mail from foreign designated operators.57 As a result, terminal dues less than the long-run 

average incremental cost for last-mile activities distort efficient competition and cause 

dynamic inefficiency. 

The distortion of competition for last-mile activities is limited to liberalized markets and 

market segments. There are still many countries with a monopoly for ordinary letters. 

Countries with liberalized postal sectors include EU28 and New Zealand. In most of the 

remaining 163 UPU member countries there is no competition on last mile delivery of 

ordinary letters.58

 

 

56 The long run average incremental cost is the (long run) additional costs associated with the provision of a specific product. 

It is calculated as the average of all (fixed and variable) costs that a company incurs to produce a particular product (including product-specific fixed costs). 

57 Failure to cover LRAIC indicates that a firm is not recovering all the (attributable) fixed costs of producing the good or 

service in question and that an equally efficient competitor could be foreclosed from the market. Cf. European Commission 

(2009), p. 5 

58 Small packets, newspapers, magazines and catalogues are sometimes understood as letter post but are normally not covered 

by letter monopoly. 
Final report 

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Moreover, in most European countries, the designated postal operators have market 

shares well above 95 percent in terms of volume and revenues. In some domestic letter 

post markets, delivery competition with market shares above five percent exists, notably 

in Bulgaria, Croatia, Germany, Italy, the Netherlands, Poland, Spain and Sweden.59 This 

suggests that last-mile activities often are not attractive for competitors. The fact that 

parcel and express markets are significantly less concentrated60, however, indicates that 

distortions could emerge in relation to last-mile handling of packets (which often can be 

substituted by parcel or express delivery). 

Under-compensation of last-mile handling of cross-border letter post items 

The UPU terminal dues system aims to be country-specific and cost-reflective. However, 

due to caps, floors, and discounts provided to transition country operators, this is not the 

case. 

If terminal dues are lower than the cost61 of last-mile handling of cross-border letter post 

items, then the last-mile operator may make a net loss on incoming cross-border items. 

Disproportionately low terminal dues on specific (costly) last-mile services, such as registered letters and packets – often used for e-commerce shipments -, create large losses. 

In some countries, designated operators may request compensation for the loss incurred 

on inbound letter post if the losses contribute to the net cost of the universal service obligation. If compensation is granted by the state and funded with tax money, this could lead 

to a distortionary spill-over effect on consumption in other parts of the society), thereby 

leading to allocative inefficiency. 

The concern about a subsidy between designated postal operators leading to spill-over 

effects on consumers is primarily relevant for high cost target countries that are net importers of letter post items, such as Norway.62 Previous estimates of the magnitude of the 

subsidy suggest that the total transfer from “losers” to “winners” within group 1.1 could be 

as high as SDR 276 million (corresponding to 418 million USD in 2014.63 These results 

are discussed further in chapter 4. 

 

59 WIK Consult (2013), Main developments in the postal sector, pp. 165, 237 

60 In many countries the three largest parcel and express operators achieve a combined market share above 60 percent, Cf. 

WIK Consult (2013), Main developments in the postal sector, pp. 165, 237 

61 If terminal dues are lower than the average incremental cost of last mile delivery, this implies that the cost for the postal 

operator of delivering the letter is larger than the compensation received. In this case, terminal dues do not contribute to 

the recovery of the postal operator’s fixed and common costs. If terminal dues are between the average incremental cost and 

the average total cost for last-mile delivery, this implies that terminal dues contribute to the recovery of fixed and common 

costs. Terminal dues above the average total cost imply that the postal operator makes a net profit on the last-mile delivery 

of cross-border letters. 

62 The reason for this is that designated postal operators in target countries often are subject to terminal dues rates capped 

below the cost of last-mile delivery. As a result, postal operators in target countries lose money on inbound letter volumes. 

Net importers are most severely affected as potential gains on outbound letter volumes do not outweigh the losses incurred 

on inbound volumes. This has for example been discussed by Campbell (2014). 

63 Campbell (2014). As the author notes, this is a very rough estimate based on a number of assumptions and excluding the 

unknown ameliorating effects of REIMS and bilateral agreements. 
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Distortions of decisions in the first-mile phase 

As with last-mile activities, first-mile activities can also be conducted by different delivery 

operators. In addition to the national (designated) postal operator, non-designated operators (both in terms of end-to-end delivery operators and consolidators) can conduct firstmile activities such as collection, transport, and sorting of letter post items. The main 

decisions affected by terminal dues made by the first-mile operators are: 

 Which delivery options to offer for end-to-end delivery 

 At what prices and conditions to offer these services 

 Which operator to engage with for last-mile handling of cross-border items 

The price for last-mile activities (directly affected by terminal dues) is an important cost 

element for the first-mile operator. Our assessment reveals the following main distortions 

of first-mile operators’ decisions: 

 Distorted competition for delivery of outbound cross-border mail 

 Distorted price-cost signals for outbound cross-border delivery 

Distorted competition for delivery of outbound cross-border mail 

UPU terminal dues are only available to designated first-mile operators. Low terminal 

dues give the designated first-mile operators a cost advantage over other first-mile operators. This distorts competition between designated and non-designated first-mile operators. As long as the market is liberalized, discrimination between designated and nondesignated operators may result in less competition in first-mile activities and thereby 

dynamic and productive inefficiency. 

In addition, if low terminal dues spill over in low prices for cross-border delivery of letter 

post (including packets) it will reduce demand for substitute delivery products, such as 

parcel delivery. Thus, by affecting the demand for parcel delivery, low terminal dues may 

make it difficult for non-designated providers of cross-border parcel delivery to compete. 

The distortion of competition for outbound delivery is only relevant for products subject 

competition. There is normally no competition on single-piece letters, but we are observing increasing competition on single-piece packets through e-commerce. 

Distorted price-cost signals for outbound cross-border delivery 

The level of terminal dues may have an impact on the price charged by the designated 

operator for end-to-end delivery of cross-border letter post items. However, terminal 

dues will only influence decisions made by senders and recipients if changes in terminal 

dues are passed on to the end-to-end price charged by the first-mile operator. 

According to microeconomic theory, a rational and profit-maximizing delivery operator 

would let prices for cross-border delivery reflect costs and demand (i.e., competition). As 

shown earlier, the pass-on rate of cost changes will be determined by the competitive 

context. Whereas lower marginal costs will be directly reflected in lower prices in a situation with perfect competition, this is normally not the case in an oligopolistic or monopolistic setting. This, however, does not exclude the possibility that sub-optimal individual 
Final report 

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rationality induces postal operators subject to less than perfect competition to set prices 

for cross-border delivery of letter post items close terminal dues (Box 7). 

Box 7 Terminal dues and prices for cross-border mail 

Pricing to maximize profits

In a situation with two cross-border delivery services, one subject to competition and one not 

subject to competition, the profit maximizing price for the non-competitive product will be the 

terminal dues plus a high mark-up. The price for competitive products will be set lower. It will be 

constrained by the prices offered by competing delivery operators, which depend on the competitors’ cost levels (but not on terminal dues paid by the designated operator). Thus, profit maximizing pricing of cross-border delivery will not be dependent on the level of terminal dues. 

Pricing to maximize individual incentives 

Pricing based on suboptimal individual rationality often arises in situations with a principal-agent 

problem where the party responsible for determining prices is not responsible for overall company 

profitability. Instead of aiming for maximized profits for the business overall, the individual goal 

determining the price strategy may be another, e.g., to attract higher volumes of cross-border 

mail in order to protect the position of the international mail department. In this situation, it may 

be rational for the individual to set the price for competitive products close to the terminal dues. 

Comparison 

The diagram below depicts two scenarios—one with pricing to maximize profits, one with pricing 

to maximize individual incentives. In both cases, the designated operator sets a price for a competitive service lower than its non-designated competitor. The mark-up on costs is significantly 

higher where the price for cross-border delivery is set just below the competitors’ price. 

Micro-economic reasoning versus suboptimal individual rationality

Source: Copenhagen Economics 

Distortions of decisions in the buying phase 

As described above, terminal dues can only distort senders’ decisions when terminal dues 

have an impact on the prices charged by first-mile operators for end-to-end delivery of 

Mark-up on terminal dues 

Terminal dues 

Designated 

operator

Nondesignated 

operator

Micro 

economic 

reasoning

Suboptimal 

individual 

rationality

Designated 

operator

Nondesignated 

operator

Non-designated 

operator’s cost

Designated 

operator’s price

Designated 

operator’s price
Final report 

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cross-border letter post items. For the purpose of the analysis in this chapter, we depart 

from the assumption that there is at least some pass-on from last-mile operators to agents 

further down the value chain. When it comes to measuring the distortions created by terminal dues (chapter 4) an important part of the analysis will be to establish whether 

low/high terminal dues actually spill over into low/high prices for cross-border delivery. 

 

When analysing the decisions of agents buying delivery services we distinguish between 

four different types of decision makers with different needs: (i) e-retailers and mail order 

firms buying delivery of packets or parcels for items weighing more or less than 2 kg; (ii) 

e-shoppers buying delivery of packets or parcels for items weighing more or less than 2 

kg; (iii) bulk mailers buying delivery of letters with correspondence (direct mail, invoices, 

bank statements etc.); and (iv) small businesses or private consumers buying delivery of 

single-piece letters. 

The main decisions made by e-retailers and mail order firms are: 

 Which products to sell 

 To which destination(s) to offer shipping 

 What delivery option(s) to offer and what price to charge e-shoppers 

 With which delivery operator(s) to engage 

 Where to locate the warehouse or production of goods sold 

The main decisions made by e-shoppers are: 

 Where to buy the product (online or in a physical store, domestically or abroad) 

 Which of the available delivery options to choose 

 Whether and how to return the item bought 

The main decisions made by bulk mail senders are: 

 What to send (size, shape, weight) 

 Where to send 

 How many items to send 

 Where to inject the letters 

 With which delivery operator(s) to engage 

The main decisions made by senders of single-piece letters are: 

 What delivery option to choose 

 With which delivery operator to engage 

These decisions are to a large extent driven by prices and conditions for different delivery 

options. These may, in turn, be affected by the level of terminal dues. Although the decisions made by these different types of agents differ to some extent, we find that the distortions created by the UPU terminal dues system are very similar and can be grouped into 

four categories: 

 Excessive demand for cross-border delivery 

 Inefficient remail 

 Too-high demand for services within the UPU framework 

 Inefficient location of warehouses, production and printing 
Final report 

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Too-high demand for cross-border delivery 

E-retailers and mail order firms decide which shipping options to offer their customers 

(including to which countries they ship). Low terminal dues reflected in low prices for 

end-to-end cross-border delivery may incentivise retailers to offer their products to foreign markets due to the competitive advantage created by low shipping costs. 

Low terminal dues reflected in low prices for cross-border delivery may incentivize consumers to buy products cross-border (from specific countries) instead of domestically, 

thereby leading to allocative inefficiency. This may also distort competition between retailers (brick-and-mortar as well as e-retailers) in countries with different levels of terminal dues, thereby leading to productive inefficiency. 

For bulk mailers, terminal dues may distort the incentives surrounding the decision of 

how many items to send. Low terminal dues resulting in an artificially low price for crossborder delivery of letters may incentivize businesses to send more letters cross-border, 

thereby resulting in allocative inefficiency. 

Inefficient remail 

Terminal dues may distort the incentives surrounding the decision of where to inject letter post items. Low terminal dues may incentivize bulk mailers to inject letters destined 

for the domestic market (A) in a foreign country (B) making the shipment a cross-border 

one (ABA remail). Low terminal dues may also induce injection of cross-border letters 

(from country A to country C) in a transition country (B) to take advantage of low terminal dues (ABC remail). Sometimes, there are good reasons to inject letters in a foreign 

country. This is the case, for example, if printing, packaging, or franking (e.g., due to lower labour costs) is cheaper in the foreign country, or if the foreign country offers possibilities in terms of advanced technologies. However, sometimes, the decision to inject letters 

in a foreign country is inefficient. This, for example, is the case if the cost of injecting letters cross-border is higher than the cost of injecting letters domestically. In this case, the 

decision to inject letters cross-border (driven by low terminal dues) will result in a distortion of allocative and possibly also productive inefficiency. 

Inefficient injection of letters appears to be a real but stable concern. However, inefficient 

injection of e-commerce packets is potentially a growing concern. The fact that UPU terminal dues vary across the different groups of postal operators depending on the weight 

of items sent (Figure 6) may (at least in theory) make it profitable to inject lighter ecommerce items in countries belonging to groups 3, 4, and 5, whereas heavier items are 

injected more profitably in countries belonging to groups 1.1 or 1.2. 
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Figure 6 UPU terminal dues schedule by weight of item 

Source: Jim Campbell 

Too-high demand for services within the UPU framework 

E-retailers decide which delivery options to offer their customers. Low terminal dues for 

letter post items may, if they spill over into low prices charged by the first-mile operator, 

incentivize e-retailers to ship items below two kilograms as packets instead of shipping 

them as parcels. By the same token, disproportionately low prices for cross-border letter 

mail delivery may incentivize e-shoppers or single piece senders (sending items up to 2 

kilograms) to buy a packet delivery service instead of an express or standard parcel delivery service. E-retailers could also be incentivized to split up large orders into several 

batches in order to be able to use the less expensive packet delivery service. Such decisions reduce demand for parcel delivery and may result in allocative inefficiency. 

The hypothesis that low terminal dues spill over in disproportionately low prices for 

cross-border delivery of packets from transition countries is confirmed when looking at 

the website of one of Asia’s largest e-commerce platforms – AliExpress. When investigating the delivery options for orders of different weights, we discovered that orders under 

two kilograms often are offered with free delivery with a designated operator. As soon as 

the order exceeds two kilograms, shipping becomes more expensive (Box 8). 
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Box 8 Case: Terminal dues spilling over in delivery costs 

A shopping test carried out on the Asian market place AliExpress reveals that the delivery of ecommerce packets below two kilograms often is disproportionately cheap. 

Most notably, the option of free shipping was no longer available when the order size rose above 

two kilograms. Thus, the marginal price of adding another unit to the basket, achieving a total 

weight above two kilograms, was disproportionately high. 

As a result, customers and retailers may benefit from breaking down the order into smaller parts 

that can be shipped by letter mail. 

Notebooks weighing 450 grams each

Notebooks weighing 200 grams each

Source: Copenhagen Economics, AliExpress.com 
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The distortion of demand for packets and parcels is a potentially large and growing concern. Global e-commerce is expected to grow by 15-20 percent per year from 2014 to 

2017.64 According to the UPU, 80 percent of mail items generated by e-commerce weigh 

below 2 kg and are processed in the letter post stream.65 Similarly, large online market 

places estimate the share of e-commerce shipments weighing less than two kilograms to 

be 70-80 percent, while the share of items of low value (without need for a track and trace 

service) is estimated to be 60-70 percent. Items up to two kilograms without need for 

track and trace can be sent as either packets or parcels. Some postal operators offer track 

and trace on registered letter post items In these cases, registered packet delivery could 

constitute a viable substitute to parcel delivery, even for more valuable items. We therefore conclude that a large share of e-commerce could be affected by the distortion created 

by low terminal dues for cross-border packet delivery. 

Inefficient location of warehouses, production, and printing 

In deciding where to locate the warehouse, production, or point of injection for products, 

low terminal dues may incentivize e-retailers and mail order firms to locate their warehouses or production sites in transition countries. Decisions to locate warehouses or production sites in transition countries may result in allocative and productive inefficiency. 

Low terminal dues may also incentivize e-retailers to inject letters and packets in certain 

countries depending on their weight. Injection of letters and packets in certain countries 

based on their weight may not be the most efficient production process, which implies the 

creation of productive inefficiency. 

Terminal dues may also distort bulk mailers’ incentives surrounding the decision of where 

to print materials. As a consequence, businesses engaged in printing may be incentivized 

to locate printing facilities in transition countries in order to senders who want to take 

advantage of low postal rates. Locating printing facilities in transition countries may not 

be the most efficient production process, thereby resulting in productive inefficiency. 

Spill-over effects of low terminal dues on sectors such as warehousing and production of 

e-commerce items are most likely small. According to industry experts, the most important deciding factor for the location of warehouses and production is shipping time 

and reliable service, not cost. 

Summary of distortions created by UPU terminal dues

The distortions identified in this chapter can be summarized in six categories (Table 8): 

 Competition for last-mile handling of cross-border letter post items 

 Competition for first-mile handling of cross-border letter post items 

 Demand for delivery services within and outside the UPU framework 

 Global mail and trade flows, both domestic and cross-border 

 Global mail and trade flows between target and transition countries 

 

64 UPU (2014), “Fulfilling the global e-commerce promise” 

65 UPU website, “About Letter Post Development”, http://www.upu.int/en/activities/letter-post-development/about-letterpost-development.html 
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 Transfers between designated delivery operators created by undercompensation of delivery costs66

Table 8 Overview of distortions created by UPU terminal dues 

 Distortions First-mile operators Last-mile operators Senders 

Distortion of competition for 

last-mile handling of crossborder letter post items 

Distorted competition for 

delivery of inbound crossborder mail  

Distortion of competition for 

first-mile handling of crossborder letter post items 

Distorted competition for delivery of 

outbound crossborder mail 

 

Distortion of demand for delivery products within and 

outside the terminal dues 

system 

 

Too-high demand for 

services within the UPU 

framework 

Distortion of global mail and 

trade flows, domestic and 

cross-border 

 

Too-high demand for 

cross-border delivery 

Inefficient remail 

Inefficient location of 

warehouses, production 

and printing 

Distortion of cross-border 

mail and trade flows between 

target and transition countries 

 

Inefficient remail

Inefficient location of 

warehouses, production 

and printing 

Transfer between delivery 

operators (spill-over to other 

services) 

Under-compensation of 

last-mile handling of 

inbound cross-border 

mail 

 

Source: Copenhagen Economics 

2.4 Distortions created by alternative terminal dues systems 

To determine whether alternative systems for terminal dues create the same or similar 

distortions as the UPU system, we look to whether the underlying drivers for the distortions identified in the previous chapter are present also in the alternative systems. 

REIMS 

Our analysis shows that REIMS V overall seems to be less distortionary than the UPU 

system (Table 9). 

 

66 Transfers between delivery operators are only distortionary if they create spill-over effects (e.g., higher taxes to fund postal 

operators’ losses or higher postal tariffs to rebalance losses on inbound mail).
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Table 9 Distortions created by REIMS 

 Potential distortions Distortion potentially 

present in REIMS? Comment 

Distortion of competition for last-mile handling of cross-border letter post items Maybe 

REIMS rates above LRAIC of last 

mile delivery ensure that third 

party operators can compete for 

last-mile activities. 

Distortion of competition for first-mile handling of cross-border letter post items Yes REIMS is not available to thirdparty operators in practice 

Distortion of demand for delivery products 

within and outside the terminal dues system Maybe 

If letter/packet delivery is disproportionately cheaper than 

parcel delivery 

Distortion of global mail and trade flows, 

domestic and cross-border Yes 

Size of distortion depends on 

how close REIMS rates are to the 

price of last-mile handling of 

domestic letter post items 

Distortion of cross-border mail and trade 

flows between target and transition countries Yes 

Size of distortion depends on 

how close REIMS rates are to the 

price of last-mile handling of 

domestic letter post items 

Transfer between delivery operators (spillover to other services) No 

REIMS rates closer to the price 

for last-mile handling of domestic letters reduce the likelihood 

of under-compensation and spillover effects. 

Source: Copenhagen Economics 

Although the terms and conditions of the REIMS agreement are not publicly available, 

our interviews with postal operators have revealed that REIMS rates in general are higher 

than UPU rates. This also includes the more preferential rates in REIMS East granted to 

postal operators in Eastern Europe as a transition from UPU rates to the higher REIMS 

rates. 

Based on the assumption that terminal dues under REIMS V are above the long-run average incremental cost for last-mile activities, we establish that as-efficient competitors to 

the designated operator can compete for last-mile handling of cross-border letter post. 

However, the fact that REIMS terms and conditions are only available to members of the 

IPC implies that REIMS V may distort competition for first-mile handling of cross-border 

letters. The European Commission’s ruling in 2003 required REIMS II to allow access to 

third-party operators at non-discriminatory conditions. If the same ruling were to apply 

to REIMS V, and if this condition were to be enforced in practice, then the competitive 

situation for first-mile activities would improve. 

In REIMS II, terminal dues were set to 80 percent of the domestic tariff for a priority 

letter. In a study about postal operators’ pricing behaviour, conducted on behalf of the 

European Commission in 2011, we found that single piece items (on average) were priced 

over 45 percent higher than transactional bulk mail and bulk mail was priced almost 50 

percent higher than direct mail.67 This suggests that a 20 percent discount on single piece 

tariffs may not be enough for terminal dues to equal the price of a comparable domestic 

delivery service. If REIMS rates (i.e., the prices for last-mile handling of cross-border 

letter post items) are not aligned with the prices for last-mile handling of comparable68

 

67 Copenhagen Economics (2011), Pricing behaviour of postal operators, p. 14 

68 Comparable with respect to the level of costs incurred 
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domestic letter services, this implies that the system does not eliminate distortions of 

demand between products within and outside the terminal dues system and distortions of 

global mail and trade flows. 

The impact of the REIMS system on transfers between designated operators depends on 

how close REIMS rates are to the price of last-mile handling of domestic letters. If REIMS 

rates are close to this price, it implies that postal operators most likely are compensated 

for the cost of last-mile activities and that the risk of spill-over effects on other parts of the 

economy (e.g., in terms of higher taxes to fund the under-compensation) is low. 

Bilateral agreements 

Bilateral agreements are negotiated when designated postal operators do not want to 

apply the terminal dues prescribed by UPU or REIMS. The bilateral negotiations are influenced by the level of the UPU rates, because UPU rates serve as the fall-back solution if 

negotiations break down. This creates a threat point for the operator with the larger bargaining power in the negotiations. 

Due to their confidential nature, it is difficult to assess whether bilateral agreements create similar or different distortions compared to the UPU and the REIMS systems. Nevertheless, if bilateral agreements allow delivery operators to agree on terminal dues reflecting market conditions (e.g., the competitive situation) this implies that many of the distortions identified above may be reduced or even eliminated (Table 10). 

Table 10 Distortions created by bilateral agreements 

 Distortions Bilateral agreements Comment 

Distortion of competition for last-mile 

handling of cross-border letter post 

items 

Maybe 

Bilateral rates above LRAIC of last mile 

delivery ensure that as-efficient third party 

operators can compete for last-mile activities. 

Distortion of competition for first-mile 

handling of cross-border letter post 

items 

Yes Bilateral agreements are not available to 

third-party operators 

Distortion of demand for delivery products within and outside the terminal 

dues system 

Maybe If letter mail delivery is priced disproportionately cheaper than parcel delivery

Distortion of global mail and trade flows, 

domestic and cross-border Maybe 

Bilateral rates closer to the price for domestic last-mile handling of comparable 

letter post items reduce distortions of 

global mail and trade flows. 

Distortion of cross-border mail and trade 

flows between target and transition 

countries 

Maybe Bilateral agreements are not available to 

third-party operators 

Transfer between delivery operators 

(spill-over to other services) Maybe 

Bilateral rates closer to the cost of providing for last-mile handling of cross-border 

letter post items reduce the risk of undercompensation for last-mile activities 

Source: Copenhagen Economics 
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If postal operators negotiate bilateral agreements with terminal dues at a rate above the 

LRAIC of last mile delivery, this implies that as-efficient third party operators can compete for last-mile activities.69

 

The fact that bilateral agreements allow delivery operators to discriminate between operators based on their identity (designated or non-designated) or origin (transition or target 

country) implies that bilateral agreements may still create market distortions in terms of 

reduced competition for first-mile activities and inefficient mail and trade flows (distortions between countries that are subject to different rates). The distortion of demand between domestic and cross-border mail and trade flows, however, should be eliminated if 

bilateral rates reflect the price for last-mile handling of domestic letter post products that 

are comparable with the cross-border service in terms of processing costs. 

Last, but not least, by being determined directly by the operators conducting last-mile 

activities, bilateral rates also reduce the risk of under-compensation and the potential 

spill-over effects that it may create. 

 

69 Given that the UPU rates often are used as a fallback option in bilateral negotiations, it is not certain that all bilateral 

agreements are settled at rates above the long run average incremental cost of last mile delivery. 
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Chapter 3 

Designing a new system for terminal 

dues 

3.1 Summary of findings 

Based on our value chain analysis in chapter 2, we have identified six distortions created 

by the current UPU system for terminal dues. In order to design a non-distortionary terminal dues system, we need to identify the underlying drivers for the identified distortions. An in-depth analysis of the different distortions reveals three main drivers: 

 Terminal dues being discriminatory (towards third-party operators and between 

operators within the system); 

 Terminal dues deviating from the price of last-mile handling of comparable domestic letter post products; 

 Terminal dues being lower than the long-run average incremental cost of domestic last-mile activities 

In order to not distort incentives for agents in the value chain, a non-distortionary system 

for terminal dues must be non-discriminatory (rates for the same services should be applied in the same manner to all delivery operators). Moreover, non-distortionary terminal 

dues (i.e., the price for last-mile handling of cross-border letter post items) would have to 

equal the price for last-mile handling of comparable domestic letter post items70. Applying 

a principle of “the same price for the same/comparable service” will ensure that incentives throughout the value chain are economically efficient because the price difference 

between last-mile handling of domestic and cross-border letter post items will reflect the 

cost difference between these services. It will also ensure that designated operators can 

compete for last-mile handling of cross-border letter post. Last, but not least, in order to 

prevent exclusion of non-designated operators that are as-efficient (and potentially also 

more efficient) than the designated operators, non-distortionary terminal dues must be at 

least as high as the long-run average incremental cost of last-mile activities. 

Table 11 shows an overview of the different conditions that terminal dues must fulfil in 

order to avoid distorting decisions in the value chain. It reveals that an ideal system 

where terminal dues are reflective of domestic prices for comparable mail products (in 

terms of the costs incurred in processing and handling) will eliminate all potential distortions. What constitutes a comparable mail product depends on the composition of inbound mail volumes in terms of the required treatment in the last mile and is further 

discussed later in this chapter. 

 

70 The price should equal that of a domestic service that is as comparable to the cross-border service as possible, in terms of 

processing costs (primarily sorting and transport), taking into account any additional costs associated with the handling of 

cross-border items. 
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Table 11 Overview of criteria for non-distortionary terminal dues

Distortion Nondiscrimination

TD ≥ 

LRAIC TD = ATC

TD = Price for lastmile handling of 

comparable domestic 

letter post products 

Distortion of competition for first-mile activities N&S S S 

Distortion of competition for last-mile activities N S S 

Distortion of demand from national to foreign 

origin N&S 

Distortion of demand from target to transition 

origin N&S S S 

Distortion of demand from parcels to packets N N&S 

Transfer between DOs N S S 

Note: N=Necessary condition; S=Sufficient condition 

TD=terminal dues; LRAIC=long run average incremental cost; ATC=average total cost 

Source: Copenhagen Economics 

Whereas the primary objective of an alternative, non-distortionary, system for terminal 

dues is the elimination of distortions, we also believe that an ideal system for terminal 

dues should adhere to a number of sound regulatory principles. Examples of such principles are regulatory objectives for postal tariffs in general, and terminal dues in particular, 

specified by postal sector regulatory authorities in the United States and in Europe. 

Moreover, the non-distortionary system should also comply with competition law. 

We find that an ideal solution where terminal dues equal the prices for comparable domestic delivery services would adhere to sound regulatory principles defined by postal 

regulators. This requires, however, that domestic tariffs for comparable services adhere to 

the principles. 

 

Despite the benefits of the ideal solution in terms of the elimination of distortions, its 

implementation may not be feasible. This is due to practical and political concerns. 

Practical concerns relate to the risk that the ideal solution may be complex and burdensome to administer for designated postal operators and national authorities. The main 

challenge in this respect is the selection of the domestic letter post product or products 

most similar71 to the inbound cross-border letter mix. While the UPU letter post product 

for which the terminal dues apply today goes up to 2 kg, comparable domestic services 

may span over several domestic products. For example, First-class Mail in the US only 

goes up to 13 ounces (o.37 kg). Moreover, the costs incurred in the last mile vary across 

products with different formats. Packets, for example, are (due to their bulky format) 

often more costly to handle than small letters or flats. As a result, finding one comparable 

domestic product may be difficult. 

To overcome this challenge, one could imagine a system with (similar to the REIMS system) three terminal dues rates per country – one per letter post format (P, G, E). The fact 

that the REIMS system does not seem to be overly complicated to administer implies that 

a UPU system based on three country-specific rates would not be too complicated either 

(especially if rates are non-discriminatory and apply equally to all senders). 

 

71 In terms of processing costs 
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For each letter post format, members of the UPU (in cooperation with the designated 

operators) would have to define (for each country) a domestic last-mile service which (in 

terms of processes and costs) is similar to the cross-border last-mile service (based on the 

mix of cross-border items).72 Thereafter, each member would need to document an average price for this service. Last, but not least, national authorities would have to ensure 

that designated postal operators charge the defined price for last-mile handling of crossborder letter post items, and that the price is charged to all delivery operators (irrespective of their identity or origin). 

A potential challenge here is the fact that some important letter post products (such as 

bulk letters) in many countries are outside the scope of the universal service obligation. 

This means that the prices are not monitored by the national regulatory authority and 

that it therefore may be more difficult for the national authority to ensure compliance 

with the terminal dues system. 

Political concerns primarily include the risk of reduced affordability of cross-border letter 

mail. The ideal solution implies that cross-border delivery may become more expensive 

for senders (especially in transition countries where operators enjoy lower rates for delivery of very light weight packets to target countries). 

Another political concern may be reduced profitability of some designated postal operators who, with the new rates, pay more for outbound letter post but do not increase the 

prices paid by senders to the same extent. The ideal solution may imply that postal operators in transition countries experience reduced profitability due to higher costs (caused by 

higher terminal dues) and lower revenues (caused by declining demand). In addition to 

the decline in demand caused by higher tariffs, designated operators worldwide may also 

lose mail volumes to alternative operators. Both effects may potentially impact the sustainability of the provision of universal services.

A third political concern may relate to the competitiveness of e-retailers in transition 

countries. If terminal dues paid from transition to target countries increase, it may reduce 

the attractiveness of e-retailers in transition countries for e-shoppers in target countries. 

This may make UPU members in transition countries less willing to change the current 

system. 

Last, but not least, the current discussions within the UPU regarding product/service 

definitions and the possibility of bringing terminal dues and inward land rates together 

into a common system might be an obstacle as well. 

 

72 Postal operators possess the information necessary to decide which domestic price that is most relevant. However, if the 

postal operators alone were given the task to decide on a price, this may lead to unfavourable outcomes (due to the fact that 

postal operators have the incentive to maximize their profits given the legal framework). In order to prevent this from happening, a supervisory authority (national regulator or ministry) should have the responsibility for defining the relevant domestic products (using information provided by the postal operator). In order to prevent abuse of the system, it may become necessary that UPU develops a setup for handling of complaints from postal operators regarding the terminal dues 

charged by operators in other countries. This authority could have the power to assess whether the terminal dues charged 

actually correspond to the price of a comparable domestic last-mile delivery service. 
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In order to cope with political concerns related to affordability of cross-border letters and 

sustainability of universal service provision, a practical solution could be to complement 

the ideal solution with an aid program for developing countries. The practical solution 

would imply that the ideal solution is implemented for all countries. Alongside this, a 

compensation scheme could be introduced for transition countries in groups 2, 3, 4, and 5 

in order to ensure affordability of cross-border letter mail and sustainability of provision 

of universal services. 

The practical solution would imply that decisions throughout the value chain remain undistorted. Nevertheless, in order to ensure that the aid scheme is effective and that the 

money is used as intended, the solution needs to be accompanied by rules. Rules could, 

for example, determine which postal products must be affordable (i.e., which mailers can 

be subsidised). Such rules would be necessary to prevent inefficient injection of letter post 

items and distorted e-commerce. 

The practical solution described above does not solve the potential concern regarding 

reduced competitiveness of e-retailers in transition countries. In order to cope with this 

issue, a potential solution could be to include other trade facilitating elements in the terminal dues negotiations including trade barriers, customs, and VAT. 

3.2 Drivers of distortions and proposed solutions 

In order to design a system that eliminates these distortions, we need to identify the underlying drivers for the distortions identified in chapter 2. An in-depth analysis of the 

different distortions reveals the following three main drivers of the distortions (Table 12): 

 Terminal dues being discriminatory between operators; 

 Terminal dues deviating from the price of last-mile handling of comparable 

domestic letter post products; 

 Terminal dues being lower than the long-run average incremental cost of 

domestic last-mile activities 
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Table 12 Economic distortions and their drivers 

 Distortion Source of distortion Implication

Distortion of competition for 

last-mile handling of crossborder letter post items TD < Last-mile LRAIC As-efficient NDOs in last-mile market may 

not be able to compete with DOs

Distortion of competition for 

first-mile handling of crossborder letter post items Discrimination (DO vs. NDO) NDOs in the first-mile market may not be 

able to compete with DOs 

Distortion of demand between parcels and packets 

TD < Price for last-mile handling of 

comparable domestic letter post 

items 

Increases the incentives to send packets 

instead of parcels cross-border

Distortion of demand between domestic and crossborder delivery TD < Price for last-mile handling of 

comparable domestic letter post 

items 

Increases the relative profitability of 

injecting mail in a foreign country 

Distortion of demand between target and transition 

origin delivery 

Discrimination (target vs. transition 

countries) 

Increases the relative profitability of 

injecting cross-border mail in a transition 

country 

Transfers between DOs 

TD < Price for last-mile handling of 

comparable domestic letter post 

items 

Transfer of money between DOs which 

may spill over on other parts of society 

Note: TD=terminal dues; LRAIC=long-run average incremental cost; DO=Designated operator; NDO=Nondesignated operator 

Source: Copenhagen Economics 

In the following sections, we focus on one distortion at a time. After providing a brief description of each distortion, its implications, and the underlying driver causing the observed distortion, we demonstrate how an alternative terminal dues system could eliminate the distortion in question. 

Distortion of competition for last-mile activities 

Competition for last-mile handling of cross-border letter post may be distorted if the terminal dues charged by the designated operator are lower than the long-run average incremental cost of last-mile handling of cross-border items. In this case, an as-efficient 

non-designated operator will not be able to offer a competitive price for last-mile activities. 

In theory, competition may also be distorted if the terminal dues system forces the designated operator to charge terminal dues that are higher than the competitive price offered 

by an as-efficient competitor for last-mile activities. In this case, a non-designated asefficient operator would be able to undercut the terminal dues (while still making a profit) 

and the designated operator would not be able to offer a competitive price for last-mile 

activities. However, this situation would only be relevant as far as designated operators 

were unable to conclude bilateral agreements with lower terminal dues. 

The dynamics of the distortion of competition for last-mile activities are summarised in 

Table 13. 
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Table 13 Distortion of competition for last-mile activities 

 

Situation First-mile operators decides which operator to use for last-mile activities

 Distortion First-mile operators decide to use a less efficient operator over a more efficient one

 Implication Less efficient operator used1

 Underlying driver 

for the distortion Terminal dues <long-run average incremental cost for last-mile activities

Note: 1 Only relevant for market segments where last-mile activities are liberalized. 

Source: Copenhagen Economics 

In order to explain the mechanisms underlying the distortion, we provide an example of a 

hypothetical situation with a designated operator and a non-designated operator competing for last-mile handling of cross-border items sent from a country A to a country B. 

In the example, the designated operator incurs a cost for last-mile delivery of 0.7. The 

corresponding cost for the non-designated operator is 0.6. With all else being equal, the 

non-designated operator can provide the last-mile service more efficiently (at a lower 

cost) than the designated operator. Thus, the socially optimal choice would be if the firstmile operator used the non-designated operator for last-mile activities. 

However, if the designated operator charges a terminal due for last-mile delivery of 0.5 

(i.e., below cost) and the non-designated operator charges a cost-covering price of 0.6, 

first-mile operators will always have an incentive to use the cheaper (but less efficient) 

designated operator. This situation creates a distortion where non-designated operators 

who are at least as efficient as the designated operator are foreclosed from the market 

(Figure 7). 

Figure 7 Foreclosure of as-efficient non-designated operator 

Note: DO=designated operator; NDO=non-designated operator. 

Source: Copenhagen Economics 

To eliminate distortions of competition for last-mile activities, a necessary condition is 

thus that terminal dues are at least equal to the long-run average incremental cost of 

Designated 

operator

Non-designated 

operator

Actual cost incurred by last-mile 

operator in Country B 0.7 0.6

Terminal dues in Country B 

= Cost incurred by first-mile 

operator for delivery to Country B

0.5 0.6

Price paid by sender for delivery 

to Country B (assuming no markup on costs)0.5 0.6

Efficient choice: Use nondesignated operator

Actual choice: 

Use designated operator
Final report 

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last-mile activities. This allows a non-designated operator that is “as-efficient” (i.e., has 

the same cost level) as the designated operator to compete without losing money. 

Sufficient conditions to ensure a level playing field would also be to set terminal dues 

equal to the average total cost of last-mile activities, or to set terminal dues equal to the 

domestic price for comparable last-mile activities (as long as these prices are not predatory). 

Distortion of competition for first-mile activities

Competition for first-mile activities is distorted when buyers of delivery decide to use a 

less efficient operator over a more efficient one. The distortion may occur when the structure of terminal dues discriminates between designated and non-designated operators. In 

this case, an as-efficient non-designated operator may not be able to offer a competitive 

price for first-mile activities. 

The dynamics of the distortion of competition for first-mile activities are summarised in 

Table 14. 

Table 14 Distortion of competition for first-mile activities 

Situation 

Non-designated operator decides whether to compete for first-mile handling of crossborder items

Buyers of delivery services (e-retailers, e-shoppers, business mailers) decide which 

operator to use, and which delivery options to buy or offer

 Distortion Buyers of delivery decide to use a less efficient operator over a more efficient one 

 Implication Less efficient operator used* 

Underlying driver for 

the distortion Discrimination between designated and non-designated operators 

Note: * Only relevant for products subject to potential competition (e.g., mailing houses consolidating bulk 

letters). Normally no competition on single piece “ordinary letters”, but increasing competition on single-piece packets (e-commerce) 

Source: Copenhagen Economics 

In order to explain the mechanisms underlying the distortion, we provide an example of a 

hypothetical situation with a designated operator and a non-designated operator competing for first-mile handling of cross-border items sent from country A to country B. 

In the example, the cost incurred by the designated operator for providing end-to-end 

delivery is 1.3 (0.3 for the first mile plus 1.0 for the last mile). Due to higher efficiency in 

the first-mile phase, the corresponding cost for the non-designated operator is 1.2 (0.2 for 

the first mile plus 1.0 for the last mile). With all else being equal, the non-designated operator can provide the first-mile service more efficiently (at a lower cost) than the designated operator. Thus, the socially optimal choice would be if the buyer used the nondesignated operator for first-mile activities. 

However, if the designated operator is charged a terminal due for last-mile delivery of 0.5 

and the non-designated operator is charged a price of 1.0 for last-mile delivery, and if this 

difference is reflected in the price that the buyers of delivery services pay, buyers will always have an incentive to use the cheaper (but less efficient) designated operator. This 
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situation creates a distortion where non-designated operators who are at least as efficient 

as the designated operator are foreclosed from the market (Figure 8). 

Figure 8 Foreclosure of as-efficient non-designated operator 

Source: Copenhagen Economics 

One should note that this outcome is not linked to the fact that the designated operator 

receives a price below cost. For example, if the designated operator would pay a costbased terminal dues rate of 1.0 and the non-designated operator would pay a rate of 1.2, 

this would also incentivize mailers to use the less efficient operator. 

To eliminate distortions of competition for first-mile activities, a necessary condition is 

thus that terminal dues are non-discriminatory between the designated operator and 

the non-designated operator. 

A sufficient condition to ensure a level playing field would thus be to set terminal dues 

equal to the domestic price for last-mile activities (as long as these prices are not predatory) or to set terminal dues equal to the average total cost of last-mile activities. Both 

solutions imply non-discrimination as long as the same rate is applied to all operators. 

Figure 9 illustrates a non-distortionary situation where the same terminal dues are 

charged to the designated and the non-designated operator. 

Designated 

last-mile 

operator

Designated 

first-mile 

operator

Non-designated 

first-mile 

operator

Actual cost incurred by first-mile operator 

in Country A 0.3 0.2

Actual cost incurred by designated last-mile 

operator in Country B 1.0

Terminal dues in Country B 0.5 1.0

Cost incurred by first-mile operator for 

delivery to Country B

= Price paid by sender for delivery to 

Country B (assuming no mark-up on costs)

0.8 1.2

Efficient choice: Use nondesignated operator

Actual choice: 

Use designated operator
Final report 

60 

Figure 9 Non-distorted competition for first-mile activities 

Note: Here: Terminal dues = average total cost of last-mile activities. Non-discrimination would eliminate 

the distortion even if the terminal dues did not reflect the cost of last-mile activities. 

Source: Copenhagen Economics 

Distortion of demand for services within and outside the terminal dues 

system: Packets vs. parcels 

Demand for services within and outside the terminal dues system is distorted when the 

buyers of delivery services opt to send items as packets (subject to terminal dues) when it 

would be more efficient if they were sent as parcels (subject to inward land rates). This 

can result in too many packets being sent, and too few parcels. The distortion may occur if 

the difference in prices for last-mile handling of packets and parcels (which equals the 

marginal benefit received by consumers who are indifferent between buying packet and 

parcel delivery) does not equal the difference in costs (i.e. the marginal cost incurred by 

producers) for last-mile handling of packets and parcels.73 For example, some consumers 

might be willing to pay for the additional costs incurred in parcel delivery. In an optimal 

situation, these consumers should choose parcel delivery instead of packet delivery. However, if the price difference between parcel delivery and packet delivery exceeds the difference in the actual costs of providing these services, some consumers may not be willing to 

pay the higher price of parcel delivery. This will lead to suboptimal choices where too few 

customers buy parcel delivery. For this distortion to play out in reality, however, the distorted difference between price and cost for last-mile activities must spill over to the endto-end delivery prices paid by those who make the choice between parcel and packet delivery. 

If this is the case, e-retailers considering what shipping options to offer their customers 

may decide to offer to send items under 2 kg as packets instead of parcels, or offer to split 

orders totalling over 2 kg into multiple deliveries, so that each delivery can be mailed as a 

packet instead of a parcel. Similarly, e-shoppers who are faced with the options to buy 

packet or parcel delivery may prefer to buy packet delivery, although this choice is not 

efficient. 

The dynamics of this distortion are summarised in Table 15. 

 

73 In economics terms, this implies that the marginal rate of substitution does not equal the marginal rate of transformation 

for packets and parcels. 

Designated 

last-mile 

operator

Designated 

first-mile 

operator

Non-designated 

first-mile 

operator

Actual cost incurred by first-mile operator 

in Country A 0.3 0.2

Actual cost incurred by designated last-mile 

operator in Country B 1.0

Terminal dues in Country B 1.0 1.0

Cost incurred by first-mile operator for 

delivery to Country B

= Price paid by sender for delivery to 

Country B (assuming no mark-up on costs)

1.3 1.2

Efficient choice: Use nondesignated operator

Actual choice: 

Use non-designated operator
Final report 

61 

Table 15 Distortion of demand for services within and outside 

the terminal dues framework 

Situation 

E-retailers considering what options to offer their customers for orders less than 2 kg

E-retailers considering what options to offer their customers for orders more than 2 kg

E-shoppers deciding what delivery service to use when buying online

 Distortion 

E-retailers offer packet instead of parcel delivery although this is not efficient

E-retailers split purchased items totalling over 2 kg into multiple packet deliveries

E-shoppers choose packet instead of parcel delivery although this is not efficient

 Implication Excessive demand for packet delivery

Too low demand for parcel delivery

Underlying driver 

for the distortion TD<price for comparable domestic last-mile activities

Source: Copenhagen Economics 

In order to explain the mechanisms underlying the distortion of demand, we again provide an example of a hypothetical situation with cross-border items sent from a country A 

to a country B 

In the example, the cost incurred by the designated operator for delivering a packet is 0.7. 

The corresponding cost for delivering a parcel is 0.9. Due to the fact that parcel delivery 

includes some additional features that packet delivery does not contain (e.g., track-andtrace), senders and recipients normally have a slightly higher willingness to pay for parcel 

delivery. In our example, senders are willing to pay 1.0 for packet delivery and 1.2 for 

parcel delivery. This difference in willingness to pay equals the underlying cost difference 

between packet and parcel delivery. If the prices for packet and parcel delivery would 

have been set equal to their actual costs, this would have meant that senders would be 

indifferent between packet and parcel delivery. Irrespective of which service they would 

buy, they would be equally well off. 

However, if the price for sending a parcel is 1.0 and the price for sending a packet is 0.6 

(due to the level of terminal dues), this means that packet delivery is priced disproportionately low (0.4 lower than parcel delivery). E-retailers and e-shoppers will therefore 

always have an incentive to buy packet delivery. This situation creates a distortion where 

too many items are sent as packets instead of as parcels (Figure 10). 
Final report 

62 

Figure 10 Distortion of demand for services within and outside 

the terminal dues framework 

Note: Socially optimal choice occurs when the price difference between parcel delivery and packet delivery = 

cost difference between parcel delivery and packet delivery 

For the sake of simplicity, this example assumes that the costs incurred in the first mile are zero. 

WTP=willingness to pay 

Source: Copenhagen Economics 

To eliminate distortions of demand for services within and outside the terminal dues system, a necessary condition is that the price difference between parcel delivery and packet 

delivery should equal the cost difference between the two services. This will ensure that 

consumers switch if their benefit from switching from one product to another exceed the 

cost to producers of switching production. It is also necessary that terminal dues for 

packets are at least equal to the long-run average incremental cost of providing last-mile 

handling of bulk packets. If this is not the case, providers of parcel delivery would not be 

able to compete due to the under-priced packet delivery service.74

If there is no distortion in domestic delivery prices, the conditions above will be fulfilled 

if terminal dues equal the domestic price for last-mile handling of comparable packet 

delivery services. If domestic prices are distorted (e.g., through a disproportionately low 

price for packet delivery compared with parcel delivery), setting terminal dues equal to 

the price for last-mile handling of domestic packets would not create any additional 

distortion. 

Figure 11 illustrates a non-distortionary situation where the price difference between parcel delivery and packet delivery equals the cost difference. In this example, the terminal 

dues is set equal to the price for domestic last-mile handling of packets, where the designated operator generates a mark-up of 0.1 on costs. This means that the terminal dues for 

sending a packet to country B are 0.8 (0.7 plus 0.1). The 0.1 mark-up on costs for lastmile handling of packets equals the mark-up on costs for last-mile handling of parcels 

(resulting in an inward land rate for parcel delivery of 1.0). 

 

74 This requires, however, that low terminal dues spill over to low end-users by increasing their prices. 

Parcel Packet Difference

(a) WTP 1.2 1.0 0.2

(b) Actual cost incurred by last-mile operator 

in Country B 0.9 0.7 0.2

(c) Total surplus = (a-b) 0.3 0.3

(d) Terminal dues /inward land rate

= Cost incurred by first-mile operator for 

delivery to Country B 

= Price paid by sender for delivery to Country 

B (assuming no mark-up on costs)

1.0 0.6 0.4

(e) Consumer surplus = (a-d) 0.2 0.4 0.2

Efficient choice: 

Sender indifferent between packet and parcel

Actual choice: 

Preference to send packet
Final report 

63 

Figure 11 Non-distorted demand for services within and outside 

the terminal dues framework 

Note: Terminal dues =price for domestic last-mile activities. 

 For the sake of simplicity, this example assumes that the costs incurred in the first mile are zero. 

 WTP=willingness to pay 

Source: Copenhagen Economics 

As visible from the example above, a non-distortionary situation does not necessarily 

require that the price for last-mile handling of cross-border items is equal to the underlying cost (i.e., zero mark-up on costs). Distortions would be eliminated as long as the relationship between prices (including any mark-up on costs) reflects the relationship between actual costs incurred. 

Distortion of global mail and trade flows 

Global mail and trade flows are distorted when e-shoppers, e-retailers, print houses, and 

large mailers decide to buy, send, or locate their business activities cross-border instead 

of domestically, even though this would not be cost-efficient (i.e., where the additional 

costs of buying, sending, or locating business activities cross-border are offset by an artificially low price for sending cross-border mail). This can result in excessive cross-border 

mail and trade, as well as inefficient location of print houses, warehouses, and production. 

Global mail and trade flows are also distorted when senders of cross-border mail or buyers of cross-border delivery services decide to inject mail or buy delivery in a transition 

country instead of in a target country. One example of this would be an e-shopper in 

Denmark who (due to the lower terminal dues rate on items shipped from transition 

countries) choses to buy online from China instead of buying online from France. 

The underlying reason for distortions of global mail and trade flows are terminal dues 

which do not reflect the price for last-mile handling of comparable domestic letter post 

items. 

The dynamics of this distortion are summarised in Table 16. 

Parcel Packet Difference

(a) WTP 1.2 1.0 0.2

(b) Actual cost incurred by last-mile operator 

in Country B 0.9 0.7 0.2

(c) Total surplus = (a-b) 0.3 0.3

(d) Terminal dues /inward land rate

= Cost incurred by first-mile operator for 

delivery to Country B 

= Price paid by sender for delivery to Country 

B (assuming no mark-up on costs)

1.0 0.8 0.2

(e) Consumer surplus = (a-d) 0.2 0.2

Efficient choice: 

Sender indifferent between packet and parcel

Actual choice: 

Sender indifferent between packet and parcel
Final report 

64 

Table 16 Distortion of global mail and trade flows 

Distortion of decision to buy domestically or cross-border

Situation 

E-shoppers consider whether to buy from an e-retailer domestic or abroad

E-retailers consider whether to locate warehouse/production domestic or abroad

E-retailers consider what customers to serve (domestic and/or foreign)

Print houses consider to locate printing facilities domestic or abroad

Large mailers consider whether to print and inject invoices to its domestic clients via 

the domestic postal operator or via a postal operator abroad

 Distortion Decision to buy/send/locate activities cross-border although this decision is inefficient

 Implication 

Too much cross-border mail

Too much cross-border trade

Inefficient location of print houses/warehouses/production

Underlying driver 

for the distortion TD<price for comparable domestic last-mile activities

Distortion of decision to buy from transition or target country

Situation E-shoppers deciding which foreign country (target or transition) to order from

 Distortion E-shopper choose to buy from transition country, because shipping will be relatively 

less costly although this decision is inefficient (less costly to ship from target country)

 Implication Inefficient mail and trade flows

Underlying driver 

for the distortion Discrimination between operators in target and transition countries

Source: Copenhagen Economics 

In order to explain the mechanisms underlying the distortion of global mail and trade 

flows, we provide two examples. The examples outline a hypothetical situation with a 

buyer’s decision of (i) whether to purchase domestic or cross-border delivery and (ii) from 

which foreign country to purchase cross-border delivery. 

In the first example, the buyer decides whether to purchase delivery domestically (in 

country A) or cross-border (country B). The cost for end-to-end domestic delivery is 0.9. 

The end-to-end cost incurred for cross-border delivery is 1.0 (cost for first-mile activities 

in country B plus the cost for last-mile activities in country A). With all else being equal, 

the items in question can be sent most efficiently (at lowest cost) domestically. Thus, the 

socially optimal choice would be if the buyer decided to purchase domestic delivery. 

However, if the price of end-to-end domestic delivery is 0.9, and the price of cross-border 

delivery is 0.7 (cost for first mile in country B plus the terminal due in country A) buyers 

will always have an incentive to use the cheaper (but less efficient) sending method. This 

situation creates a distortion where too much mail is sent cross-border (Figure 12). 
Final report 

65 

Figure 12 Distortion of decisions to buy domestic vs. cross-border

Source: Copenhagen Economics 

In the second example, the buyer decides whether to purchase cross-border delivery from 

a target country (B) or from a transition country (C). The end-to-end cost incurred for 

cross-border delivery from country B is 0.9 (first-mile cost in country B plus last-mile cost 

in country A). The end-to-end cost incurred for cross-border delivery from country C is 

1.0 (first-mile cost in country C plus last-mile cost in country A). With all else being equal, 

the items in question can be sent most efficiently (at lowest cost) from country B. Thus, 

the socially optimal choice would be if the buyer decided to purchase from country B. 

However, if discriminatory terminal dues imply that the cost for the first-mile operator in 

country B is 0.675, and the cost for cross-border delivery from country C is 0.576, and if this 

cost difference is reflected in the prices paid by buyers of delivery services, buyers will 

always have an incentive to use the cheaper (but less efficient) sending method. This situation creates a distortion with inefficient mail and trade flows (Figure 13). 

It should be noted that a distortion would occur also in a case where the terminal dues 

from both countries were above the cost of last-mile activities. 

 

75 Cost for first-mile in country B plus terminal dues in country A 

76 Cost for first-mile in country C plus terminal dues in country A 

Domestic 

delivery (A)

Cross-border 

delivery (B A)

Actual cost incurred by first-mile operator 0.1 0.2

Actual cost incurred by last-mile operator 0.8 0.8

Terminal dues in Country A 0.5

Cost incurred by first-mile operator for 

delivery within/to Country A

= Price paid by sender for delivery within/to 

Country A (assuming no mark-up on costs)

0.9 0.7

Efficient choice: Print mail in A

Actual choice: 

Print mail in B and send to A
Final report 

66 

Figure 13 Distortion of decisions to buy cross-border 

Source: Copenhagen Economics 

To eliminate distortions of global mail and trade flows, a necessary condition is to set 

terminal dues equal to the domestic price for last-mile handling of comparable letter post 

items. This would mean that the price difference between cross-border deliver and domestic delivery would equal the cost difference between the two services. 

This implies that all foreign delivery operators must receive the same prices and conditions for last mile delivery and that these prices and conditions should equal those for 

domestic mailers77. Figure 14 illustrates a non-distortionary situation where the price 

difference between domestic and cross-border delivery will equal the cost difference. 

Figure 14 Non-distorted decisions to buy domestic or cross-border 

Note: Here, terminal due equals the price for domestic last-mile activities which, in turn, equals the actual 

cost for domestic delivery (first-mile plus last-mile). 

Source: Copenhagen Economics 

To eliminate distortions of decisions to buy cross-border delivery from target vs. transition countries, a necessary condition is non-discrimination between delivery operators in 

different countries. However, non-discrimination will not eliminate the distortion of decisions to buy domestic or cross-border. 

A sufficient condition which would solve both distortions would thus be to have terminal 

dues set equal to the tariff for last-mile handling of comparable domestic delivery ser-

 

77 Prices for cross-border last-mile delivery should, however, be adjusted for any increased costs related to the handling of 

cross-border items. 

Cross-border 

delivery from B

Cross-border 

delivery from C

Actual cost incurred by first-mile operator 0.1 0.2

Actual cost incurred by last-mile operator 0.8 0.8

Terminal dues in Country A 0.5 0.3

Cost incurred by first-mile operator for 

delivery to Country A

= Price paid by sender for delivery to 

Country A (assuming no mark-up on costs)

0.6 0.5

Efficient choice: Purchase from B

Actual choice: Purchase from C

Domestic 

delivery (A)

Cross-border 

delivery (B A)

Actual cost incurred by first-mile operator 0.1 0.2

Actual cost incurred by last-mile operator 0.8 0.8

Terminal dues in Country A 0.8

Cost incurred by first-mile operator for 

delivery within/to Country A

= Price paid by sender for delivery within/to 

Country A (assuming no mark-up on costs)

0.9 1.0

Efficient choice: Print mail in A

Actual choice: Print mail in A
Final report 

67 

vices78. This involves an implicit non-discrimination requirement. Figure 15 illustrates 

this non-distortionary situation where the price difference between parcel delivery and 

packet delivery will equal the cost difference. 

Figure 15 Non-distorted decisions to buy cross-border 

Note: Here, terminal dues are the same for operators in target and transition countries (but still below cost)

Source: Copenhagen Economics 

Transfers between designated delivery operators 

If terminal dues are lower than the actual cost for last mile delivery, this implies that 

postal operators (compared to a situation where terminal dues cover the cost of last-mile 

activities) lose money on delivery of inbound letter post items and gain money on delivery 

of outbound letter post items. This is not a distortion of economic efficiency per se. 

However, financial transfers between delivery operators may result in spill-over effects. 

Postal operators losing money on their cross-border businesses may, for example, charge 

higher prices on other services, or claim a government subsidy enabled by higher taxes, 

thereby creating distortions. 

The dynamics of the transfers between designated delivery operators are summarised in 

Table 17. 

Table 17 Transfer between designated delivery operators 

Situation Target country designated operator must accept incoming mail from all countries

Target country designated operator must send outgoing mail to all countries

 Distortion 

Some operators underpay for outgoing mail/are undercompensated for incoming mail

Over- and under compensation should be measured relative to the situation with terminal dues reflecting the market based price

 Implication 

High cost operators subsidise low cost operators

Spill-over effects: Countries being undercompensated may charge higher prices on 

other services, or receive government subsidy which may spill over in higher taxes 

Underlying driver 

for the distortion TD<price for comparable domestic last-mile activities

Source: Copenhagen Economics 

In order to explain the mechanisms underlying the transfers between designated delivery 

operators, we provide an example of two hypothetical designated delivery operators. 

 

78 Possibly adjusted for additional costs incurred in the handling of cross-border items. 

Cross-border 

delivery from B

Cross-border 

delivery from C

Actual cost incurred by first-mile operator 0.1 0.2

Actual cost incurred by last-mile operator 0.8 0.8

Terminal dues in Country A 0.5 0.5

Cost incurred by first-mile operator for 

delivery to Country A

= Price paid by sender for delivery to 

Country A (assuming no mark-up on costs)

0.6 0.7

Efficient choice: Purchase from B

Actual choice: Purchase from B
Final report 

68 

In the example, two designated operators deliver cross-border mail to each other. The 

cost incurred by Operator A for last-mile delivery is 0.8. The cost incurred by Operator B 

for last-mile delivery is 0.5. The terminal dues remuneration is the same for both operators and is set equal to 0.5. We assume that terminal dues in the optimal situation would 

be equal to the price for domestic last-mile delivery and that this price, due to competition in the domestic mail market, would be equal to the cost of last-mile delivery. This 

would imply terminal dues of 0.8 for delivery to country A and a terminal dues of 0.5 for 

delivery to country B. 

The distortion of terminal dues implies that Operator A operates at a loss of 0.3 per incoming cross-border letter, while Operator B breaks even. It also implies that Operator B 

pays a price for each outbound letter that is 0.3 lower than the price he would pay in the 

non-distorted situation. 

Overall, there is a transfer of 0.3 from A to B for every letter sent from B to A (Figure 16). 

Figure 16 Transfer between designated delivery operators 

Source: Copenhagen Economics 

Due to the fact that cross-border mail flows are asymmetric (some postal operators are 

net importers of mail whereas others are net exporters), the terminal dues system creates 

“winners” and “losers” compared to a situation where terminal dues would cover delivery 

costs. 

To remove the transfer, terminal dues could be set equal to the average total cost of lastmile activities. This would ensure full coverage of costs and no loss of money for postal 

operators. However, terminal dues equal to the average total cost may encourage entry of 

less efficient competitors specialising in last-mile handling of cross-border mail. 

An alternative solution could be to set terminal dues equal to the price for last-mile handling of comparable domestic letter post items (adjusted for additional costs incurred in 

Inbound Operator A Operator B

Cost 0.8 0.5

Remuneration 0.5 0.5

Gain/loss -0.3 0

Implication: Transfer of money 

from A to B for every letter sent from 

B to A

A B 

Cost for last mile: 0.8 Cost for last mile: 0.5

Terminal due: 0.5 Terminal due: 0.5

Outbound Operator A Operator B

Cost 0.5 0.8

Price 0.5 0.5

Gain/loss 0 0.3
Final report 

69 

handling cross-border items). Some postal operators (e.g., in the UK and in Sweden) have 

introduced geographic zoned pricing for bulk domestic mail, i.e., higher charges for areas 

of high delivery costs. In order to eliminate distortions, these price differences could and 

should be applied to inbound letter post as well. This will allow the designated operator to 

recover costs while setting terminal dues at a level mirroring the competitive conditions. 

This solution may allow some operators to achieve a high margin on last-mile activities. 

However, this should not pose a problem as long as prices are not excessive. 

A situation where terminal dues are set equal to the price for last-mile handling of domestic items is shown in Figure 17. 

Figure 17 No transfer between designated delivery operators 

Note: Here, terminal dues equal the price for domestic last-mile activities 

Source: Copenhagen Economics 

3.3 Designing a non-distortionary system for terminal dues 

In order not to distort incentives for agents in the value chain, a non-distortionary system 

for terminal dues must respond to the underlying drivers for distortions identified in the 

previous section. 

Based on the analysis conducted so far, Table 18 shows an overview of the different conditions that terminal dues must fulfil in order to avoid distorting decisions in the value 

chain. It demonstrates that elimination of distortions requires that the terminal dues are 

applied in a non-discriminatory way to all operators, irrespective of their origin or status 

as designated or non-designated postal operators. It also reveals that a system where terminal dues equal the prices for last-mile handling of comparable domestic letter post 

products (possibly adjusted for any additional costs incurred in handling cross-border 

items) will eliminate any potential distortions. The main reason for this is that, in order to 

eliminate distortions, the price differences between different delivery services should 

reflect the underlying cost differences between the same services. Since cross-border mail 

is collected and consolidated before it is injected in the last-mile network and thereafter 

A B 

Cost for last mile: 0.8

Price for domestic last-mile delivery: 0.9

Cost for last mile: 0.5

Price for domestic last-mile delivery: 0.6

Terminal due: 0.9 Terminal due: 0.6

Inbound Operator A Operator B

Cost 0.8 0.5

Remuneration 0.9 0.6

Gain/loss 0.1 0.1

Implication: No transfer 

between operators Outbound Operator A Operator B

Cost 0.5 0.8

Price 0.6 0.9

Gain/loss -0.1 -0.1
Final report 

70 

consolidated with domestic mail, the processes required in the last-mile operations are 

very similar to those for domestic letter post. For this reason, using the price for last-mile 

handling of domestic mail should be a good starting point. However, while it may be fairly 

straightforward to find a domestic letter product comparable to international letters, one 

should take into account that an increasing share of cross-border volumes is made up of 

small packets (which incur higher costs in the last mile). Thus, finding one domestic 

product that is comparable to the entire mix of cross-border items may be challenging. In 

order to reduce this problem, one could identify three terminal dues rates (one per letter 

post format - P, G, and E). This would allow designated postal operators to charge higher 

terminal dues for cross-border packets than for cross-border letters. This type of framework is already in place in the REIMS system where different terminal dues are applied 

for P, G, and E items. What specific domestic letter post products (within the three categories) are most similar to inbound cross-border letter post - and therefore should be 

used as reference products - needs further assessment on a country-by-country basis. 

Table 18 Overview of criteria for non-distortionary terminal 

dues 

Distortion Nondiscrimination

TD ≥ 

LRAIC 

TD = 

ATC 

TD = Price for 

last-mile handling 

of comparable 

domestic items 

Distortion of competition for first-mile activities N&S S S 

Distortion of competition for last-mile activities N S S 

Distortion of demand from national to foreign origin N&S 

Distortion of demand from target to transition origin N&S S S 

Distortion of demand from parcels to packets N N&S 

Transfer between DOs N S S 

Note: N=Necessary condition 

S=Sufficient condition 

Source: Copenhagen Economics 

Whereas the primary objective of a non-distortionary system for terminal dues is eliminating distortions, we also believe that an ideal system for terminal dues should adhere to 

a number of sound regulatory principles. Examples of such principles are provided by the 

general objectives specified by postal sector regulatory authorities. Table 19 shows the 

general objectives regarding tariffs and terminal dues defined by postal regulators in the 

United States and in Europe. 
Final report 

71 

Table 19 General objectives for postal tariffs and terminal dues 

 United States (39 US Code Section 3622) Europe (Directive 2008/6/EC)

Maximize incentives for delivery operators to reduce costs 

and increase efficiency Incentivize efficient universal service provision 

Create predictability and stability in rates Transparent USO tariffs and terminal dues

Maintain high quality service standards Provide for high-quality service provision

Allow the delivery operators pricing flexibility -

Ensure adequate revenues to maintain financial stability -

Reduce administrative burden and increase transparency 

of ratemaking process -

Establish and maintain a just and reasonable schedule for 

rates and classifications Affordability of USO tariffs

Allocate the total institutional costs of the Postal Service 

appropriately between market-dominant and competitive 

products 

-

- Non-discriminatory USO tariffs and terminal dues

- Cost-orientation of USO tariffs and terminal dues 

Note: Directive 2008/6/EC only refers to universal service providers 

Source: 39 US Code Section 3622: Modern Rate Regulation, Legal Information Institute, 2006; Directive

2008/6/EC of the European Parliament and of the Council. Official Journal of the European Union, European Union website 

Benchmarking of the various criteria for non-distortionary terminal dues outlined above 

against the objectives reveal that terminal dues equal to the price for last-mile handling of 

domestic letter post items comparable to the mix of inbound letter post items will meet 

most of the identified objectives (Table 20). In particular, provided that domestic delivery 

prices meet the objectives identified by postal regulatory authorities, terminal dues will 

meet the objectives as well. 

Table 20 Fulfilment of objectives defined in postal regulation 

Regulatory objectives Nondiscrimination

TD ≥ 

LRAIC 

TD = 

ATC 

TD = Price for 

last-mile handling 

of comparable 

domestic items 

 Efficiency incentives -  - * 

 Stable rates - - () * 

 Pricing flexibility   - * 

 Transparency - - - * 

 Financial stability   ** * 

 High quality service provision - - - - 

 Just and reasonable/affordable rates - - () * 

Appropriate allocation of institutional costs n/a n/a n/a n/a 

Non-discrimination between DOs  -  

Cost-oriented prices/terminal dues - -  * 

Note: *The fulfilment of the objective only is valid as far as the domestic prices for last-mile activities fulfil the 

objective in question. **Depends on the level of current prices. 

Source: Copenhagen Economics 

In the following, we discuss each of the objectives in more detail. 

First, both U.S. and EU postal regulation state that postal tariffs must provide efficiency 

incentives. Terminal dues equal to the price for last-mile handling of domestic letter post 
Final report 

72 

items would meet this second criterion as long as the domestic rates are above the longrun average incremental cost of last-mile activities. This objective would also be met by a 

direct requirement of terminal dues above the long-run average incremental cost of lastmile activities. 

Second, rates should be stable, but the operator should be afforded pricing flexibility. As 

far as domestic prices for the relevant letter post products meet these criteria, terminal 

dues equal to domestic prices would meet these criteria as well. Pricing flexibility would 

also be ensured by a non-discrimination rule, and by terminal dues above the long-run 

average incremental cost of last-mile activities. 

A terminal dues system where the sole requirement is to set rates above the long-run average incremental cost is similar to a system based on competition law alone where prices 

set by a firm with a dominant market position are considered unlawfully low (predatory) 

if they are set below a certain cost benchmark (for multi-product firms with a high share 

of joint and common costs, the relevant cost benchmark is normally the average avoidable 

costs or the long-run average incremental costs).79 Provided efficient and swift enforcement of competition law, this system would prevent anti-competitive discrimination and 

ensure that “as efficient” competitors can compete. Efficient and swift enforcement of 

competition law may, however, be difficult. This may especially be the case for competition authorities with limited resources and in cases where other sectors receive priority. 

Third, prices should be transparent80. As long as domestic last-mile tariffs are considered 

transparent by the national regulator, this would also apply to terminal dues equal to the 

price for last-mile handling of domestic letter post items. 

Fourth, the pricing should lead to financial stability. Terminal dues equal to the price for 

last-mile handling of comparable domestic letter post items would be conducive to 

achieving this goal, if domestic rates are not regulated at a level below cost. The objective 

would also be met by terminal dues equal to the average total cost of last-mile activities, 

terminal dues above the long-run average incremental cost, and terminal dues subject to a 

non-discrimination rule only. 

Fifth, the rates should promote high quality provision of services. None of the alternatives 

above meets this objective directly. To provide postal operators with an incentive to maintain high quality of service, which may be costly, a solution could be to include a quality 

incentive. A quality incentive could imply that terminal dues are reduced up to a certain 

percentage in case the last-mile operator does not achieve a pre-defined target quality of 

service. This is very similar to the quality of service incentives that apply to target country 

operators under the current UPU system. 

 

79 See for example International Competition Network (2008), Report on Predatory Pricing, p. 9-11, 36-37 

80 What constitutes transparent rates differs across countries. In a study about the pricing behaviour of postal operators in 

Europe from 2012, it was revealed that only 12 out of 31 national postal regulators had defined criteria for transparency of 

postal tariffs. Nevertheless, it was also found that regulators without a definition of transparency still undertake measures 

to ensure transparency. The most commonly used measures were requirements regarding the publication of public price 

lists (20 regulators) and publication of pricing principles (4 regulators). Source: Copenhagen Economics (2012), Pricing behaviour of postal operators, p. 206 
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Finally, the rates should be just and reasonable. The ability of the different alternatives to 

achieve this goal depends on the pass-on to consumers (e.g., whether a requirement to set 

terminal dues above the long-run average incremental cost translates into end-user tariffs 

close to this cost, or if the operator puts a high-mark up on the cost). 

In addition to the requirements discussed in relation to US policy above, the EU postal 

directive contains two additional objectives. 

First, the EU postal directive states that tariffs for universal services and terminal dues 

should be non-discriminatory (i.e., applied equally to all buyers). However, regarding 

terminal dues, the directive only mentions non-discrimination among designated operators. In order to eliminate distortions of competition, however, non-discrimination is 

required not only among designated operators, but also towards third-party nondesignated operators. With respect to the alternative solutions, non-discrimination could 

be achieved by (i) a direct non-discrimination obligation requiring designated operators 

to apply the same terminal dues to all operators using the last-mile service, (ii) terminal 

dues equal to the average total cost of last-mile activities, or (iii) terminal dues equal to 

the price for comparable domestic last-mile activities. 

Second, the EU postal directive states that tariffs for universal services and terminal dues 

should be ‘cost-oriented’81. A terminal dues system with rates equal to the cost for lastmile activities might minimize distortion of competition on last-mile handling of crossborder letter post items (as-efficient competitors able to compete with designated operator). It would (in combination with a non-discrimination requirement) eliminate distortions in first-mile handling of cross-border items. Last, but not least, it could also reduce 

the risk of excessive prices and might also reduce transfers between postal operators. 

The only alternative that directly will ensure cost-orientation is terminal dues equal to the 

average total cost of last-mile activities. However, cost-orientation of terminal dues could 

also be ensured by rates equal to the price for domestic last-mile activities, provided that 

the relevant domestic rates are cost-oriented. As long as the prices for last-mile handling 

of domestic letter post items are not cost-oriented, cost-oriented terminal dues would still 

create distortions (Box 9). 

 

81 The EU Third Postal Directive (Directive 2008/6 EC) does not provide a definition of ‘cost orientation’. There is also no case 

law in Europe defining at what level cost-orientation should be measured in the postal sector. In the electronic communications sector, the European Commission has decided that “cost orientation of tariffs means as a general rule that prices are 

adjusted such that revenues are balanced with costs”, cf. Commission Decisions 97/114/EC, 97/310/EC, 97/603/EC and 

97/607/EC. 
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Box 9 Cost-oriented terminal dues may not eliminate distortions

In the example below, the cost for last-mile handling of domestic and cross-border letter post items is 0.7. The mark-up on this cost is 0.3 for domestic letter post items, 

leading to a price for last-mile handling of domestic mail of 1.0. 

If terminal dues are set equal to the cost in this case (i.e., a zero mark-up on costs) 

this would imply that senders (all else being equal) would have a preference for crossborder delivery compared to domestic delivery. 

This might result in a distortion of global mail and trade flows where e-shoppers buy 

too much cross-border and where large mailers inject mail for the domestic market in 

foreign countries instead of delivering it domestically end-to-end. 

Cost and price for last-mile handling of letters in country A 

Source: Copenhagen Economics 

In addition to the remaining distortion of international mail and trade flows, costorientation of terminal dues poses other challenges. The most prominent one is the difficulty to ensure cost orientation in practice. The reason for this is the lack of accurate cost 

data (country-specific) which makes it difficult to determine accurate cost-based terminal 

dues levels.82 Moreover, it is also difficult to determine which cost benchmark to use. Setting terminal dues equal to the marginal cost of delivery is not possible due to high joint 

and common costs. Another option would be to set terminal dues equal to average variable cost or average total cost. This, however, may distort efficient competition. Last, but 

not least, capping terminal dues by costs would not provide for efficiency incentives. 

Based on the assessment above, we conclude that the ideal solution would be a terminal 

dues system where rates equal the price for last-mile handling of domestic delivery services that are comparable to the mix of inbound letters (in terms of the processing required and the costs incurred). 

3.4 Need for a practical solution 

Implementation of the ideal solution identified above may not be feasible due to practical 

and political concerns. 

 

82 This has for example been acknowledged by Ghosal (1999) - Competition in International Postal Markets, p. 3 

0.7 0.7

1.0

0.7

Cost and price for last mile delivery of letters in country A

Domestic letter Cross-border letter

Cost Price paid by domestic Cost

mailers

Terminal due = Price 

paid by foreign 

delivery operators

0.3

0
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Practical concerns include the risk that the ideal solution may be complex and burdensome to administer for designated postal operators and national authorities. The fact that 

the REIMS system for terminal dues does not seem to be overly complicated to administer implies that a UPU system based on country-specific rates would not be too complicated either. Nevertheless, implementing a system with terminal dues equal to the prices 

for last-mile handling of comparable domestic letter products may pose some practical 

challenges. The main challenge in this respect is the selection of the domestic letter 

products (for each country) that are most similar to the inbound cross-border letter mix 

in terms of processing and associated costs. 

First, inbound cross-border letters consist of a mix of letters that are different with respect to the amount and type of processing required in the last-mile phase. Letters collected as single-piece items in the country of origin are normally the most costly items to 

process, primarily because of their different formats and due to address information that 

sometimes is incomplete or of poor quality. Moreover, since an increasing share of crossborder volumes is made up of small packets (which incur higher costs in the last mile), 

finding one domestic product that is comparable to the entire mix of cross-border items 

will most likely be challenging. In order to reduce this problem, one could introduce a 

terminal dues system with three different rates - one per letter post format (P, G, and E). 

This type of framework is already in place in the REIMS system where different terminal 

dues are applied for P, G, and E items. 

In order to define the prices (one per format) for last-mile delivery of cross-border letters, 

one must first identify the average level of required processing for inbound cross-border 

items (small letters, large letters, and packets). Based on this, one must identify three 

domestic letter post products that are most similar (in terms of processing requirements 

and associated costs) to the cross-border mix of items within each format. 

Depending on the availability of information about inbound letter post quality and spectrum of domestic letter post products, this exercise will most likely be easier in some 

countries than in others. For example, in the United States, First-Class mail has one nonautomated pre-sort tariff, meaning that the mail pieces have no barcode, but have some 

minimal pre-sorting. Eligibility for this tariff also requires the purchase of a permit and a 

minimum mailing of 500 pieces. If inbound small letters to the U.S. on average gets the 

same number of sorts that First-Class single-piece mail gets, this could imply that the 

First-Class non-automated pre-sort tariff should be applied to inbound cross-border 

small letters to avoid distortions. 

Using the single piece letter tariff (or a share thereof) as a benchmark for terminal dues 

would not be an optimal solution. There are two main reasons for this. First, prices for 

domestic single piece letter delivery are often subject to price regulation. This implies that 

the single-piece price in some countries is very low and may not even cover the cost of 

last-mile activities. Second, in countries where single-piece prices are not regulated at a 

low level, the single-piece price often reflects an inelastic demand (compared to the demand for bulk mail). As a result, the price of single-piece items may be disproportionately 

high. We have over the past few years observed price increases for single-piece items (e.g., 
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in Canada, the Netherlands and in Finland) in the range of 20 to 40 percent from one 

year to another. Underlying costs have most likely not changed to the same extent. The 

single-piece tariff (or even a share thereof) may therefore not be a good indicator of the 

actual costs incurred. 

When the most similar domestic letter products (within each format) have been identified, one needs to document an average price per format. Last, but not least, national 

authorities would have to ensure that postal operators charge these prices for last-mile 

handling of cross-border letter post items, and that the same prices are charged to all 

delivery operators (irrespective of their identity or origin). If the most similar domestic 

products identified are outside the scope of the universal service obligation, this would 

make it more challenging for regulatory authorities to ensure compliance with the terminal dues system (as prices are not monitored by the regulator). 

Political concerns primarily include the risk of reduced affordability of cross-border letter 

mail. The ideal solution implies that cross-border delivery may become more expensive 

for senders (especially in transition countries where operators enjoy lower rates than 

operators in target countries). 

There is to our knowledge no extensive publicly available research on the correlation between terminal dues and prices for international letter mail originating in transition 

countries. In 2010, the UPU Postal Operations Council published results of market research showing that the outbound terminal dues as share of the international letter tariffs 

were between 21 and 123 percent for developing countries (on average). The lowest share 

was found for letters weighing 20 grams whereas the highest share was found for letters 

weighing 500 grams. For items weighing between 1 and 2 kilograms, the terminal dues’ 

share of the international postage was reported to be between 57 and 74 percent.83 If 

senders in transition countries already today pay tariffs significantly above the terminal 

dues rate (i.e., the domestic postal operator in the transition country earns a high margin 

on outbound cross-border mail), an increase in terminal dues may only reduce the margin 

for the postal operator. Based on the research findings referred to above, this seems to be 

the case for single piece light-weight letters at least (i.e., letter items that normally are 

subject to postal regulation affordability criteria). In this case, an increase in terminal 

dues would have no effect on the price paid by individual senders. The same holds true if 

international letter tariffs today are determined by competition (i.e., competitors’ delivery 

costs) instead of by the level of terminal dues. 

If senders pay a price close to the terminal due plus any costs incurred in the first mile84

, 

or if the postal operator is able to pass on the higher cost to its customers, higher terminal 

dues may imply a reduced demand for international letter delivery. This is allocatively 

efficient, but maybe not socially desirable.85 

 

83 UPU (2010), POC C 1 TDG 2010.1–Doc 3c 

84 This is most likely the case for certain types of bulk mail. One example of this is the often observed ‘free shipping’ offers for 

e-commerce products up to two kilograms sent from Asia to Europe (cf. chapter 2) 

85 As social policy, it would seem that the case for under-pricing mail from developing countries to industrialized countries is 

limited to social mail only, not business mail and e-commerce packets. 
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Another political concern may be reduced profitability of postal operators. The ideal solution may imply that postal operators in transition countries experience reduced profitability due to higher prices paid for last-mile delivery of cross-border letter post (caused by 

higher terminal dues) and lower revenues (caused by declining demand). 

In addition to the decline in demand caused by higher terminal dues, designated operators worldwide may also lose mail volumes to alternative operators (who gain in competitiveness due to non-discriminatory treatment). 

Both effects may potentially impact the sustainability of the provision of universal services. 

A third political concern may relate to the competitiveness of e-retailers in transition 

countries. If terminal dues paid from transition to target countries increase, it may reduce 

the attractiveness of e-retailers in transition countries to e-shoppers in industrialised 

countries. 

Last, but not least, the current discussions within the UPU regarding product/service 

definitions and the possibility of bringing terminal dues and inward land rates together 

into a common system might be an obstacle as well. 

In order to cope with the first two political concerns mentioned above, a practical solution 

could be to complement the ideal solution with an aid program for developing countries. 

The practical solution would imply that the ideal solution is implemented for all countries. Alongside this, a compensation scheme could be introduced for transition countries 

in groups 2, 3, 4, and 5 in order to ensure affordability of cross-border letter mail and 

sustainability of provision of universal services in developing countries. 

The possible design of a compensation scheme could be a foreign aid scheme where funding can be used to (i) ensure affordability of cross-border letters or (ii) ensure sustainable 

provision of universal services. This is rather similar to the current quality of service fund 

(applied to the terminal dues payments from target countries) from which transition 

countries can apply for money in order to fund specific development projects, aimed to 

improve the quality of delivery of international mail. 

The practical solution would imply that incentives throughout the value chain remain 

undistorted. Nevertheless, in order to ensure that the aid scheme is effective and that the 

money is used in line with the political intentions, the solution needs to be accompanied 

by rules. Rules could, for example, determine which postal products that must be affordable (i.e., which mailers that can be subsidised). Such rules would be necessary to prevent 

inefficient remail and distorted e-commerce. 

With this practical solution, a remaining concern would be the reduced competitiveness 

of e-retailers in transition countries. In order to cope with this issue, a potential solution 

could be to include other trade facilitating elements in the terminal dues discussion as 

well. This could for example be questions relating to trade barriers, customs, and VAT. 
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Chapter 4 

Measuring distortions of terminal 

dues 

4.1 Summary of findings 

In this chapter we propose an empirical framework for qualifying and quantifying the 

economic distortions identified in the previous chapters. 

To measure distortions created by the current system of terminal dues, one must compare 

the actual situation with the current set of terminal dues to the counterfactual situation, 

in which terminal dues are non-distortionary. The difference between the two situations 

can be identified as a distortion of the ideal state. 

We propose a framework when the measurement of distortions is split into two steps. The 

first step is a qualification or screening step where the likelihood and significance of distortions are determined. The second step is a quantification step where the magnitude of 

the distortions is estimated. Only if distortions are identified as real and significant in the 

first step should one proceed to step two. 

Approaches to assess the likelihood of distortions occurring are different for the different 

distortions identified. Whereas distortions of competition for last-mile handling of crossborder letter post items can be assessed by comparing terminal dues to the cost of lastmile activities or through benchmarking with market segments without any distortions 

created by terminal dues, other distortions require other approaches. For example, to 

assess the extent of a distortion of global mail and trade flows or distortions of demand 

for packets versus parcels, it is important to first establish the degree to which terminal 

dues charged for last-mile activities have an impact on the price paid by end-users. If 

terminal dues only have little influence on end-user prices for delivery, the distortion of 

demand will most likely be small as well. 

Table 21 presents an overview of methods that can be used for assessing the likelihood 

and significance of distortions created by terminal dues. 
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Table 21 Framework for measuring if distortions are real and 

significant 

Distortion Approach 

Distorted competition for lastmile activities 

⋅ Investigate if there is a legal or de facto monopoly on last-mile handling of letter post items 

⋅ Investigate relation between terminal dues and LRAIC for last-mile 

handling 

⋅ Benchmark with competitive situation in non-distorted market segments 

Distorted competition for firstmile activities 

⋅ Investigate difference between terminal dues paid by designated and 

non-designated operators 

⋅ Investigate importance of delivery price for choice of delivery operator 

⋅ Benchmark with competitive situation in non-distorted market segments 

Distorted demand for packets and 

parcels 

⋅ Investigate correlation between terminal dues and prices for crossborder packets 

⋅ Investigate importance of delivery price for choice of delivery service 

based on cross-price elasticity for packet and parcel delivery 

Distorted mail/trade flows between domestic and cross-border 

origination and between target 

and transition origin 

⋅ Investigate the relation between terminal dues and the price for lastmile handling of comparable domestic letter post items 

⋅ Investigate correlation between terminal dues and prices for crossborder letter post items 

⋅ Investigate importance of delivery price for decisions to buy 

online/inject letters cross-border 

⋅ Investigate link between terminal dues and demand for cross-border 

letters post items 

Transfers between delivery operators ⋅ Calculate difference between terminal dues and prices for last-mile 

handling of domestic letter post items 

Source: Copenhagen Economics 

If terminal dues are found to have an actual impact on demand for delivery services, there 

are several options for how to assess the magnitude of the distortion on question. Simple 

comparisons of cross-border mail and trade flows and more advanced gravity models and 

difference-in-differences analysis can be used to estimate the impact of distortions on 

global mail and trade flows in terms of mail volumes and associated revenues. 

In order to measure the effects of distortions on the wider economy (in terms of effects on 

social welfare, prices of services, import and exports, output, employment, and GDP) a 

more comprehensive approach is needed. A good tool for this could be a computable general equilibrium (CGE) model. 

The CGE modelling approach estimates the impact of barriers to trade on total economic 

welfare. It builds on recent economic literature, which suggests that close availability of a 

diverse set of products and services is important to economic growth. In the context of 

terminal dues, distortion of competition for first-mile and/or last-mile activities caused 

by terminal dues could be included in the model as an increase in the cost of service production. Similarly, the distortion of global mail and trade flows (caused by discriminatory 

and sometimes too low terminal dues) could be included in the model as a non-tariff barrier equivalent to the terminal dues. In this way, the CGE model might be able to estimate 

the impact of a change in terminal dues on total economic welfare. 
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4.2 General framework for measuring distortions 

As identified in chapter 3, the current UPU terminal dues system engenders potential 

distortions primarily as a consequence of the following three characteristics: 

• Terminal dues may be lower than the long-run average incremental cost for lastmile activities 

• Terminal dues may be lower than the price for last-mile handling of comparable 

domestic letter post products 

• Terminal dues are discriminatory (across member operators and towards thirdparty operators) 

Whenever one of the above characteristics is present, there is potential for distortions. 

Table 22 presents an overview of the potential distortions identified in previous chapters. 

Table 22 Distortions – overview 

Distortion Main source of distortion 

Distorted competition for last-mile activities Terminal dues < last-mile LRAIC 

Distorted competition for first-mile activities Terminal dues not available to third-party operators (discrimination) 

Distorted demand for packets and parcels Terminal dues < price for last-mile handling of domestic letter 

post items 

Distorted mail/trade flows between domestic 

and cross-border origination 

Terminal dues < price for last-mile handling of domestic letter 

post items 

Distorted mail/trade flows between target and 

transition origination 

Discriminatory terminal dues between target and transition 

countries 

Transfers between delivery operators Terminal dues < price for last-mile handling of domestic letter 

post items 

Note: LRAIC=long-run average incremental cost 

Source: Copenhagen Economics 

The first question that arises is whether the distortions above appear in reality. If they do, 

the second question that arises is how large they are. The third question that arises is how 

much the distortions matter for total social welfare, i.e., the economy-wide effects. 

 

A general framework for assessing whether the distortions identified in previous chapters 

are real and significant should contain the following three questions: 

1. What would the non-distortive terminal dues rate be? 

2. How would delivery operators, senders, and recipients react to the new set of 

terminal dues? 

3. Which volumes are potentially affected by the distortions? 

Answering these questions would offer insight into:

 

1. The size of the gap between distorted and non-distorted terminal dues rates 

2. Whether the distortion is likely to occur in reality 

3. The significance of identified distortions 

If terminal dues are found to have an actual impact on demand for delivery services, one 

could continue with attempts to quantify the magnitude of the distortions in terms of (i) 
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their impact on trade and mail flows and (ii) their impact on social welfare, prices of services, import and exports, output, employment, and GDP. 

In the following sections we discuss how each of the identified distortions can be qualified 

and quantified within this framework. We also outline the relevant data that would be 

necessary to conduct the assessments. 

4.3 Estimating the likelihood and significance of potential 

distortions 

Distortion of competition for last-mile activities 

When the market for domestic (last-mile) delivery is liberalized, non-designated operators may compete for delivery of last-mile cross-border mail volumes. However, if terminal dues are below the long-run average incremental cost of last-mile activities, this will 

prevent operators as efficient as the designated operator from competing in this market.86

Thus, non-distortive terminal dues will need to be at least at level with the long-run average incremental cost for last-mile handling of cross-border letter post items. In a country 

with competition in domestic last-mile activities, the competitive price for last-mile handling of cross-border items is probably close to the price for last-mile handling of comparable domestic items (possibly adjusted for higher costs related to the handling of crossborder items). 

Figure 18 presents a framework for measuring distortions of competition for last-mile 

activities created by the current level of terminal dues. 

 

86 According to EU competition law, it is unlawful for a dominant operator to price below the long-run average incremental 

cost. Failure to cover the long-run average incremental costs indicates that the dominant firm is not recovering all the (attributable) fixed costs of providing the service in question and that an equally efficient competitor could be foreclosed from 

the market. See for example European Commission (2009), p. 5. 
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Figure 18 Framework for measuring distortions of last-mile 

competition 

Source: Copenhagen Economics 

Is there is a legal or de facto monopoly on last-mile handling of letter post items? 

As last-mile competition can only be distorted insofar as competition is possible, the first 

step is thus to investigate whether competition is possible or not. If competition is prevented by law, or if competition is impossible due to factors such as high barriers to entry, 

then there will most likely be no distortion created by terminal dues, because even with 

non-distortive terminal dues, there would be no competition in the market. 

Are terminal dues below the long-run average incremental cost for last-mile activities? 

If terminal dues are below the cost of last mile delivery, this means that an operator asefficient as the designated postal operator will not be able to compete. Although there is 

no firm consensus about what the relevant cost benchmark should be, recent case law87

and the guidelines from the European Commission88 suggest that the relevant cost 

benchmark should probably be the long-run average incremental cost. There are two 

main approaches to estimating the long-run average incremental costs of last-mile activities. The first approach is referred to as a top-down approach. In the top-down approach, 

accounting data is used to determine the costs associated with last-mile activities. The 

second approach is referred to as a bottom-up approach. The bottom-up approach is 

based on a value chain analysis where activities in the value chain are identified and costs 

associated with each activity are estimated. The main characteristics of the top-down and 

the bottom-up approach for estimating long-run average incremental costs are shown in 

Table 23. 

 

87 C-209/10, Post Danmark 

88 European Commission (2009), Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC 

Treaty to abusive exclusionary conduct by dominant undertakings 

Is there a legal or de facto monopoly on lastmile handling of letter post items?

Are terminal dues higher than the long-run 

average incremental cost of last-mile 

handling of letter post items? 

Actual distortion of competition for last-mile 

handling of cross-border letter post items

How large are the volumes/revenues subject 

to potential competition? 

No

Yes

No

Yes

Small

Significant

Distortion small or non-existing

No further investigation needed

Include distortion in CGE model

Qualification

Quantification
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Table 23 LRAIC for last-mile delivery: top-down vs. bottom-up 

 Top-down approach Bottom-up approach

 Based on accounting data Based on value chain 

 Distribution of aggregated costs Measurement of cost incurred by specific activities

 Complex calculations Intuitive and simple calculations

 Extensive data needs No extensive data needs 

Source: Copenhagen Economics 

When estimating incremental costs in the postal sector, the main challenge is the large 

share of joint and common costs in mail delivery. The fact that the same machines and 

the same postal workers are used to process and deliver many different types of mail 

items implies that the cost of delivering one extra item is often very low. Top-down cost 

estimates are derived from aggregated financial data using the fully distributed costing 

method. This implies that incremental costs not always can be derived directly from accounting data. Moreover, it can be difficult for authorities to assess the reliability of cost 

estimates based on accounting data. 

The bottom-up approach has proven to be a practical, intuitive, and effective way of coping with the challenges linked to accounting data and estimating incremental delivery 

costs in the postal sector. Under this approach, costs are calculated based on measures for 

elementary activities (e.g., number of visits to letter boxes) multiplied by unit costs for the 

different resources (e.g., cost per visit per letterbox). The costs of elementary activities are 

aggregated to establish the costs for the relevant service (e.g., last-mile handling of crossborder letters). 

Box 10 describes how costs can be estimated in practice based on the bottom-up approach. 
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Box 10 Bottom-up approach to cost assessment 

The bottom-up approach to incremental cost assessment uses the postal value chain as its point of 

departure. The bottom-up approach therefore requires a good understanding of the activities taking place in relation to mail delivery. The approach consists of three steps: 

1. Describing the relevant activities in the value chain 

2. Describing how activities would be different if a product was removed 

3. Quantifying changes and estimate costs 

With respect to last-mile handling of cross-border letter post items, the relevant activities in the 

value chain could be: handling of items when received from first-mile operator, transport to sorting 

centre, sorting, transport to delivery office, handling of items at delivery office, delivery to recipients, handling of undeliverable items, and general administration. 

If cross-border items would be removed from the activities identified above, this would result in 

(amongst other things): fewer items being handled, less time being spent on sorting and delivery, 

less time being spent on handling registered letters and undeliverable items. 

The illustration below shows the final delivery phase and the activities that are fully, partly, or not 

incremental to the delivery of cross-border letters. A similar exercise to identify the costs incremental to the handling of cross-border letters should be conducted for the other last-mile activities 

as well, such as transport, sorting and general administration. 

Incremental costs in the final delivery phase 

To quantify these changes and estimate incremental costs, one often needs to combine several 

sources of information. Sources of information could include postal operators’ annual reports, statistics on the number of cross-border letters of different formats and weights, statistics on the 

share of cross-border items sent as registered letters, and time studies estimating the time spent 

on different activities in the production process. 

Source: Copenhagen Economics 

The bottom-up approach allows authorities to cross-check the top-down data provided by 

the postal operator. The European group of postal regulators (ERGP) has recognized the 
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usefulness of the bottom-up approach for this purpose,89 and the national competition 

authorities in Denmark and Germany have applied price cost tests based on bottom-up 

cost calculations.90 Using the bottom-up approach in the context of terminal dues could 

allow for determining if terminal dues are above the long-run average incremental cost 

for last-mile activities, in order to tell whether an as-efficient non-designated competitor 

can compete. 

Table 24 below presents the data requirements for conducting the assessments described 

above. 

Table 24 Data for identifying distortions of last-mile activities 

Assessment Data requirement Data source 

Calculation of 

LRAIC 

Internal accounts of designated postal operator (to calculate 

LRAIC in last-mile activities) 

National postal operator

Information about costs incurred and volumes handled in different 

steps of the postal value chain 

National postal operator

Source: Copenhagen Economics 

How large are the volumes subject to potential competition? 

The estimate of volumes potentially affected by the distortion will indicate the significance of the distortion (e.g., the share of the total postal market subject to the distortion). 

Inbound cross-border items normally subject to competition are bulk letters and packets. 

These items normally correspond to no more than two percent of total (i.e., domestic and 

international) volumes delivered (cf. chapter 1). Nevertheless, there may be firms that can 

make a business case for last-mile delivery of cross-border items, for example in larger 

cities. 

If the distortion is considered significant enough, one should proceed with an attempt to 

quantify the wider effects on total social welfare. This could be done based on a computable general equilibrium (CGE) model which is able to capture the total effects of all significant distortions. The CGE model and its application to the context of terminal dues are 

described in section 4.4. 

Distortion of competition for first-mile activities

The fact that third-party operators do not have access to the terms and conditions of the 

UPU terminal dues system may distort competition between designated and nondesignated operators in the market for first-mile handling of cross-border letter post. 

Figure 19 presents a framework for measuring the distortions of first-mile competition. 

 

 

89 ERGP (2011) 

90 Copenhagen Economics (2012), p. 268 
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Figure 19 Framework for measuring distortions of first-mile 

competition 

Source: Copenhagen Economics 

Is there a large difference between terminal dues paid by designated and nondesignated operators? 

Terminal dues will only distort competition for first-mile activities insofar as designated 

and non-designated operators are charged different rates for the same service (i.e., lastmile handling of cross-border letter post items). In order to measure the effects of terminal dues, it is therefore crucial to examine whether the terminal dues charged to designated and non-designated operators are significantly different. There is no general rule for 

what constitutes a significant difference in terminal dues. However, a difference of less 

than five percent is not likely to have a large impact on the competitiveness of nondesignated first-mile operators.91

 

This information can only be provided by the designated postal operators themselves, for 

example in interviews or in response to a questionnaire from the national regulator. 

If there is a large difference between the terminal dues paid by designated and nondesignated operators for the same service, this could indicate a distortion. 

How important is the price of delivery for the choice of delivery operator? 

The extent to which distorted prices affect decisions depends on how important prices are 

for the decisions made. If prices only play a minor role when senders and recipients decide which operator to use, then distorted prices will most likely not distort decisions. 

However, if the price is an important factor when choosing among delivery operators, 

then competition is likely to be distorted. The importance of prices for the choice of delivery operator can be examined via interviews with large mailers or online surveys among 

e-shoppers. 

 

91 Competition authorities generally use 5 to 10 percent as a threshold for significant price increases , e.g., in relation to the 

SSNIP test used to define relevant markets. 

Is there a high correlation between terminal dues 

and the prices for cross-border letter post?

How important is the price of delivery for the 

choice of delivery operator?

Likely distortion of competition for first-mile 

handling of cross-border letter post items

How large are the volumes/revenues subject to 

potential competition?

Include distortion in CGE model 

Distortion small or non-existing

No further investigation needed

Yes

No

Not very 

important

Small

Significant

Very important

Qualification

Quantification
Final report 

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How large are the volumes subject to potential competition? 

By estimating the volumes potentially affected by the distortion, one would get an indication of its potential magnitude. For first-mile activities, volumes normally subject to potential competition are outbound cross-border bulk letters. One could also imagine that 

first-mile handling of single-piece packets could be attractive for non-designated operators who already deliver single-piece parcels and have a network in place for collection of 

single-piece items. 

The level of competition (amount of work-sharing) in first-mile handling of domestic 

letters provides an indication of the volumes subject to potential competition. For example, if 50 percent of domestic mail is handled by non-designated operators, while zero 

percent of cross-border mail is handled by non-designated operators, this could indicate 

that there is potential for competitors’ market share for cross-border deliveries to be as 

high as 50 percent. 

Interviews with non-designated operators, regional carriers, and large mailers that engage in first-mile activities for domestic letter post items could also provide useful information about the volumes subject to potential competition. Interviews could for example 

provide useful information on why these operators do not participate in the market for 

cross-border delivery (due to terminal dues or other reasons). Interviews with nondesignated operators in relation to this study have indicated that terminal dues are an 

actual impediment to competition for first-mile handling of cross-border letter post. 

The data necessary for qualifying the distortions of competition for first-mile activities are 

summarized in Table 25 below. 

Table 25 Data for measuring distortions in first-mile activities 

Assessment Data requirement Data source 

Correlation 

between terminal dues and 

end-user tariffs 

Terminal due rates for different destinations (for several countries) National postal operators, UPU 

Price data for cross-border letters (per destination, for several 

countries) National postal operators 

Importance of 

letter prices for 

demand 

Share of mailers finding postal tariffs important for their choice 

of delivery operator 

Interviews, consumer 

surveys 

Volumes affected by the distortion 

 Share of domestic and cross-border mail letters handled by 

non-designated operators in the first-mile 

National postal operator,

National regulatory 

authority 

Source: Copenhagen Economics 

If, based on the screening exercises described above, the distortion of first-mile competition would be considered significant one could proceed with an attempt to quantify its 

wider effects on total social welfare. This could be done based on a computable general 

equilibrium (CGE) model which is able to capture the total effects of all significant distortions, cf. section 4.4. 
Final report 

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Distortion of demand for packets and parcels 

For delivery of items below two kilograms, packet delivery and parcel delivery are often 

substitutes. Substitution of packets for parcels can often be observed in e-commerce, 

where a large share of products bought weighs less than two kilograms. If the two services 

are considered (to some extent) substitutable by end-users, the price for cross-border 

packet delivery will have an impact on the demand for cross-border parcel delivery, and 

vice versa. In this situation, lowering the price on packet delivery as a response to a low 

terminal due may make it difficult for parcel delivery operators to compete with the designated operator, due to reduced demand for parcel delivery. 

The distortion of demand for packets and parcels is minimized if the terminal dues equal 

the price for last-mile handling of domestic packets (such that the price difference between packet and parcel delivery corresponds to the cost difference between the two services). 

Figure 20 presents the framework for measuring distortions of demand for packets and 

parcels. This framework is very similar to the framework for measuring distortions of 

competition in first-mile handling of letter post items (described in the previous section). 

Figure 20 Framework for measuring distortions of demand for 

packets 

Source: Copenhagen Economics 

Is there a high correlation between terminal dues and prices for cross-border packets? 

As previously mentioned, terminal dues will only distort demand for packets and parcels 

insofar as they spill over to the price for end-to-end delivery offered by the designated 

operator. 

A way to investigate the spill-over of terminal dues on end-to-end tariffs is to assess the 

correlation between terminal dues and the end-to-end prices charged for cross-border 

packet delivery. A low correlation (based on a cross-country sample) means that variations in terminal dues do not explain variations in end-to-end prices. A low correlation 

Is there a high correlation between terminal dues 

and the prices for cross-border packets?

How important is the price of delivery for the 

choice of delivery service?

Likely distortion of demand for packets and parcels

How large are the volumes potentially affected by 

the distortion?

Include distortion in CGE model 

Distortion small or non-existing

No further investigation needed

Yes

No

Not very 

important

Small

Significant

Very important

Qualification

Quantification
Final report 

89 

would thus signal that prices for cross-border packet delivery are not distorted as a result 

of terminal dues and that there is no significant distortion of demand between packet and 

parcel delivery. 

How important is the price of delivery for the choice of delivery service? 

In the case of demand for packets and parcels, the importance of prices for the choice of 

delivery service can be examined by calculating the cross-price elasticity for packet and 

parcel delivery. High cross-price elasticity between the two delivery services indicates a 

competitive pressure between the products and thereby a potentially large distortion of 

demand. 

Interviews with providers of cross-border parcel delivery could also provide useful information about the importance of prices. A key question to ask is whether parcel operators 

experience a fierce competitive pressure from low packet prices. If the answer is yes, the 

operator can be asked to provide additional documentation supporting this statement. If 

parcel delivery providers do not consider low packet prices offered by designated operators a problem, there is most likely no significant distortion of demand for packets and 

parcels. 

How large are the volumes potentially affected by the distortion? 

The distortion of demand between packet and parcel delivery will affect cross-border 

items below two kilograms, for which parcel and packet delivery are substitutes. Moreover, the distortion could be expected to have a larger impact on delivery of items of low 

value, for which track-and-trace is less important. In some countries, designated operators also offer tracking for cross-border registered letters. In these cases, packet delivery 

could be a relevant substitute to parcel delivery for a larger share of items. 

The data necessary for measuring the distortions are summarized in Table 26. 

Table 26 Data for measuring distortions of demand for packets vs. parcels

Assessment Data requirement Data source 

Correlation 

between 

terminal 

dues and 

end-user 

tariffs 

 Packet terminal due rates for different destinations (for several countries) National postal operators, UPU 

 Price data for cross-border packets (per destination, for several countries) National postal operators 

Importance 

of letter 

prices for 

demand 

Share of mailers finding postal tariffs important 

for their choice of delivery operator 

Existing studies on cross-border ecommerce, interviews with e-retailers and 

their associations 

Cross-price elasticity for packets and parcels Conjoint analysis*, natural experiments, 

consumer surveys etc. 

Volumes 

affected by 

the distortion

Volumes and revenues of designated and nondesignated operator for first-mile handling of 

cross-border items below and above two kg 

National regulatory authorities; interviews 

with operators 

Note: Conjoint analysis can be used to reveal users ́ valuation of different product attributes. By requiring the 

research participants to make a series of trade-offs, conjoint analysis can be used to reveal the willingness to pay for delivery features such as fast delivery, track and trace, and signature at delivery. 

Source: Copenhagen Economics 
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Distortion of global mail and trade flows 

Distortions of global mail and trade flows are caused by two elements in the terminal dues 

system. First, terminal dues lower than the prices for last-mile handling of domestic letter 

post items may provide foreign e-retailers with a competitive advantage and incentivize 

location of warehouses and injection of bulk mail abroad (ABA remail). Second, discrimination between target and transition countries may incentivize mailers to inject crossborder letters in transition countries instead of in target countries (ABC remail). Discriminatory treatment of transition countries may provide e-retailers in transitions countries 

with a competitive advantage. 

Figure 21presents the framework for identifying if distortions of global mail and trade 

flows are real and significant. 

Figure 21 Framework for measuring distortions of global mail and 

trade flows

Source: Copenhagen Economics 

How large is the difference between the terminal dues and the price for last-mile handling of domestic letters post? 

The magnitude of the distortions created by terminal dues will be linked to the difference 

between the terminal dues charged today and the optimal situation. If terminal dues already today are close to the price for last-mile handling of comparable domestic letter 

post items, the distortion is most likely small or non-existing. In this case, it might not be 

necessary to continue with a quantitative assessment of the distortions. 

Is there a high correlation between terminal dues and the prices for cross-border letter 

post? 

Is there a high correlation between terminal dues 

and the prices for cross-border letter post?

How important is the price of delivery for the 

choice of where to buy online/where to inject letter 

post items?

Likely distortion of demand for domestic and crossborder letter post delivery

Distortion small or non-existing

No further investigation needed

Very important

Not very 

important Qualification

No

Yes

Is there a link between the level of terminal dues 

and demand for cross-border letter post?

No

Yes

Is there a significant difference between the 

terminal dues and the price for last-mile handling 

of domestic letter post?

No

Conduct 

difference-indifferences 

analysis

Estimate 

gravity 

model

Include 

distortion in 

CGE model

Quantification

Yes
Final report 

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To investigate whether terminal dues are likely to influence mailers’ decisions of where to 

inject letter post items and e-shoppers’ decisions of where to buy online, one could assess 

the cross-country correlation between terminal dues paid (per country) and the end-toend prices charged for cross-border delivery to that country. A low correlation would signal that cross-border delivery prices are not distorted as a result of terminal dues and that 

there is no significant distortion of demand. 

How important is the price of delivery for the choice of where to inject letter post 

items/where to shop online? 

If senders and recipients do not consider price of delivery (or landed cost) a decisive factor when shopping online or when deciding in which country to inject letters, this indicates that decisions are not affected by distorted prices. 

Interviews with large mailers and surveys among e-shoppers could provide helpful insights into this question. 

A further approach to investigate the importance of delivery prices is to conduct business 

case simulations. In this way, one could assess qualitatively if the decisions made by large 

mailers, e-retailers, and e-shoppers are likely to be distorted before embarking on any 

attempts to quantify the potential distortion. 

Two relevant business cases to investigate are (i) bulk mailers’ business case for injecting 

letters cross-border instead of domestically and (ii) e-shoppers’ business case for buying 

online cross-border instead of domestically. Similar business cases can be established for 

the decisions to inject letters or shop online from a transition country instead of a target 

country. 

For the case of bulk mailers’ incentive to inject letters in a certain country, it would be 

relevant to focus on large mailers such as banks, utility companies, and insurance companies. Based on yearly letter volumes, prices for domestic delivery, and prices for crossborder delivery (including additional cost for printing or transporting letters crossborder), one could calculate the cost for (i) domestic delivery and (ii) cross-border delivery (ABA remail). One could then calculate the potential savings from cross-border delivery as a share of the total mailing cost. If the savings potential is small, the incentives for 

injecting mail cross-border will likewise be small. In this case, there is most likely no gain 

in conducting advanced calculations of quantitative effects. On the other hand, if the savings potential is significant, this would call for an in-depth assessment of quantitative 

effects. 

The same kind of business case simulation can be conducted for the case of cross-border 

versus domestic e-commerce. In this case, one could investigate the potential savings as a 

share of the landed cost (product price plus shipping) that e-shoppers in different countries could obtain by ordering online cross-border instead of domestically. 

Is there a link between the level of terminal dues and demand for cross-border letter 

post? 
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If terminal dues create distortions in global mail flows, then we would expect mailers to 

react to changes in terminal dues by changing their demand for cross-border delivery of 

letter post items. 

The link between terminal dues and the demand for cross-border mail could be investigated through case studies. A useful case study could be, for example, a postal operator 

who has negotiated a new terminal dues agreement with a significant change in terminal 

dues rates. Another useful case study could be a postal operator who has changed status 

from transition to target in the UPU system and thereby has incurred an increase in terminal dues rates. 

 

If there is a high correlation between changes in terminal dues and changes in letter post 

volumes, this could indicate that the level of terminal dues has an actual impact on mail 

flows and that it might be worth undertaking more advanced quantification exercises. 

Another way of assessing if there is a link between terminal dues and the demand for 

cross-border mail could be to compare bilateral letter post flows with bilateral trade 

flows.92 This approach relies on the assumption that global letter post flows should follow 

the same patterns as global trade flows (i.e., letter post and trade flows are determined by 

essentially the same macroeconomic and microeconomic drivers – with the exception for 

terminal dues). This is a very strong assumption which most likely is not completely applicable. For example, with respect to e-commerce deliveries, there is a risk that part of 

the distortion may be disguised if low terminal dues also increase the trade flow from 

transition countries (e.g., increased cross-border e-commerce). Nevertheless, this simplified approach may still be useful to detect any disproportionately high bilateral letter post 

flows caused by low terminal dues. 

The data necessary for the first screening or qualification of distortions are summarized 

in Table 27. 

 

92 The comparison should be done in percentage terms (e.g., if ten percent of global trade flows are between countries A and B, 

the ten percent of global mail flows ought to be between countries A and B also. 
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Table 27 Data for qualification of distortions of global mail and trade flows

Assessment Data requirement Data source 

Comparison between 

terminal dues and price 

for domestic last-mile 

activities 

Terminal dues UPU, national postal operator 

Correlation between 

terminal dues and enduser tariffs 

 Terminal dues for different destinations 

(for several countries) National postal operators, UPU 

 Price data for cross-border letter post 

(per destination, for several countries) National postal operators 

Importance of letter 

prices for demand 

Importance of price for choice of where 

to inject letter post items/where to 

shop online 

Existing studies on cross-border ecommerce, interviews with e-retailers and 

their associations, interviews with large 

mailers 

Price for last-mile handling of domestic 

letter post items National postal operator 

Price for domestic delivery Large mailers (banks, utility companies, 

insurance companies) 

Price for cross-border delivery Large mailers (banks, utility companies, 

insurance companies) 

Link between terminal 

dues and letter volumes

Development in terminal dues (crosscountry) UPU 

Development in cross-border letter post 

volumes (cross-country) 

UPU; national regulatory authorities; 

national postal operators 

Bilateral cross-border letter post flows UPU 

Bilateral cross-border trade flows OECD 

Source: Copenhagen Economics 

If the screening exercises above have shown a likely and significant distortion of global 

mail and trade flows created by terminal dues, two approaches can be adopted in order to 

quantify the impact on mail and trade volumes: 

 Difference in differences estimation 

 Gravity model estimation 

In addition to this, CGE modelling can be applied to estimate the impact of distortions on 

total economic welfare, cf. section 4.4. 

Difference in differences estimation 

A difference-in-differences estimation is an empirical method used to estimate the isolated effect of some policy change. The idea behind this methodology is to compare the performance of an entity affected by the policy change (treatment group) before-and-after 

the policy goes into effect, with the equivalent change in performance of an entity not 

affected by the policy change (control group). In this case, the relevant entities are designated postal operators and the policy change is a change in terminal due rates. 

The distortion of mail and trade flows can be measured by comparing the development in 

mail flows of two more relevant delivery products where one or several of the products are 

affected by changes in terminal dues. These changes could for example be triggered by a 

change of UPU status from transition to target country or the negotiation of a new (bilateral) terminal dues agreement with higher or lower terminal dues rates. The estimation 
Final report 

94 

will seek to answer the question whether volume developments look different for the 

flow(s) subject to the change in terminal dues. 

The methodology for conducting a difference-in-differences analysis for cross-border 

letter mail is described in Box 11. 

Box 11 Difference-in-differences analysis for cross-border mail 

A difference-in-differences analysis for cross-border mail flows uses data on two sufficiently comparable inbound mail flows where one flow is subject to terminal dues and the other is not. This 

data could, for example, be bilateral flows of cross-border e-commerce packets (subject to terminal dues) and bilateral flows of cross-border e-commerce parcels above two kilograms (not subject 

to terminal dues). 

Time series data for the flows are collected for one or several countries where terminal dues have 

changed at some point in time, for example due to a change of UPU status from transition to target country or the negotiation of a new (bilateral) terminal dues agreement with higher or lower 

terminal dues rates. In order to ensure robustness of the analysis, it is important that the data covers a sufficiently long period of time before and after the structural change. 

The illustration below shows a hypothetical example of how a policy change (here in 2005) creates 

a change in the relevant mail flow. The change is benchmarked against changes in other mail flows 

(or variables) that are highly correlated with the mail flow subject to terminal dues. 

In the illustrative example below, we observe that mail volumes decline when the country changes 

status from transition to target and terminal dues increase. The negative correlation between terminal dues and letter volumes could be used to estimate how demand for delivery of cross-border 

letter post items would react to changes in the level of terminal dues. 

Difference-in-differences: Illustrative results 

Source: Copenhagen Economics 

The main benefits of a difference-in-differences analysis are the low requirement regarding the number of model assumptions and its simple, testable methodology. The low requirement regarding the number of model assumptions is because only data on relevant 

0

2

4

6

8

10

12

14

16

18

20

2001 2005 2009

Inbound mail volumes

Other mail flow (control group)

Relevant TD mail flow (treatment group)

Trend for treatment group

Transition → Target

Impact = 

difference in 

differences
Final report 

95 

mail flows and changes in terminal dues is required, and estimations can be performed 

using data for only a few countries. 

The main drawbacks of a difference-in-differences analysis are its limited applicability, 

partial focus, and low generality. The limited applicability is due to the requirement of a 

policy change for meaningful estimation, and the requirement that benchmark products 

(control group) must follow the same trends and be exposed to the same external shocks 

as the treatment group, such as an increase in e-commerce. The partial focus is because 

the difference-in-differences analysis only considers part of the total distortion—

specifically, volume gains by transition countries under the current system. The low generality is due to the fact that difference-in-differences analysis does not consider countryspecific factors that may magnify effects, such as the propensity of e-commerce to move to 

certain transition countries. 

Gravity model estimation 

A gravity model estimation is a generalized model framework often used in international 

economics to predict bilateral trade flows based on a range of specific country characteristics.93 The model is based on the idea that much of international trade patterns can be 

explained by the economic size of the trading partners and their physical distance. In the 

model, “distance” can be broadly interpreted as various sources for international trade 

costs that affect the relative price of domestic and imported goods. These sources can 

include physical transport costs, import tariffs, and regulatory barriers, but also factors 

like language and culture. The higher these costs, the lower the level of international 

trade. 

Most gravity model work has been conducted on traditional trade (as opposed to ecommerce). However, a limited number of empirical contributions suggest an equivalent 

model could apply to predict bilateral volumes of e-commerce trade flows.94 The gravity 

model approach could most likely also be applied to the context of bulk letters (direct and 

transactional mail). The main reason for the lack of research on online trade is due to the 

absence of official statistics on online cross-border trade.95

Box 12 describes the application of a gravity model approach to the case of global mail 

and trade flows. 

 

93 Tinbergen (1962) was the first to suggest that Newton’s law of gravity could be applied to trade flows between countries. 

Deardorff (1984) concluded that the gravity model is very successful in predicting trade flows. The original Tinbergen model 

was reformulated by Anderson & Van Wincoop (2003). Since then it has been widely used in trade economics and beyond. 

94 This has for example been done by Martens & Turlea (2012) who compared online and offline trade patterns for similar 

goods within the EU, finding that the standard gravity model performs well in explaining online cross-border trade flows. 

Earlier work on the same topic has been conducted by Lend et.al. (2012) who also applied a gravity model on online crossborder trade in goods, using a eBay database with cross-border transactions between 62 countries for the period 2004-2007 

to estimate a gravity model with explanatory variables such as distance, transport costs, common language, border, legal regime or colonial background and quality of governance. 

95 Data on online trade is normally generated by private e-commerce companies who do not publish this data for commercial 

reasons. 
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Box 12 Gravity model estimation of global mail and trade flows 

The gravity model consists of a regression model where the impact of different variables on inbound mail or trade flows can be estimated based on cross-country, panel data on bilateral mail 

and trade flows and a range of country characteristics. In the case of cross-border flows of ecommerce packets, relevant variables to include in the model could be: internet access, language, 

institutional trust, access to payment and shipment methods, shipping costs, cultural factors, etc. 

The distortionary effect of terminal dues which are not aligned to the price for last-mile handling of

domestic mail could be included in the model as a variable representing the difference between 

terminal dues and the price for the most comparable domestic letter product. 

In this case, the gravity model equation could be written as: 

ln(x#$) = β& + β'ln(C#) + β)ln(C$) + β*ln(D#$) + β,ln(T#$)+ε

lnT#$ = d$ − τ#$

Where: 

x#$ Mail flow (or cross-border e-commerce) from country i to j 

C#

, C$ Variables of relevant country-specific characteristics 

D$		 Variable of relevant joint characteristics, such as transport costs, tariffs, and distance 

d$ − τ#$ Difference between price for last-mile handling of domestic letter post items in country 

j and the terminal due for an operator from country i delivering in country j 

In order to estimate the effect of the different country characteristics on bilateral e-commerce 

flows, the equation is estimated with methods such as OLS (ordinary least square) or PPML (pseudo-Poisson maximum likelihood) regressions. 

Source: Copenhagen Economics 

Although it is theoretically possible to construct a model that pins down all the factors 

that are relevant for bilateral mail and trade flows, this is a highly complex exercise. In 

particular, availability of relevant data will most likely be a challenge. As acknowledged by 

previous researchers, comprehensive data on bilateral e-commerce flows is often difficult 

to obtain. 

The main benefits of the gravity model estimation are its high level of generality and high 

potential for the quantification of distortions overall. The main drawbacks of the gravity 

model are its high data requirements necessary to derive robust results; little reference to 

e-commerce and mail flows in previous literature; the difficulties of testing the model, 

which is very sensitive to misspecification (omitted variable bias); and the difficulties of 

isolating the effects of terminal dues. 

The data necessary for estimating the impact on mail and trade flows are summarized in 

Table 28. 
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Table 28 Data for quantification of distortions of global mail and trade 

flows

Assessment Data requirement Data source 

Difference in 

differences 

analysis 

Time series data on inbound flows of e-commerce 

packets 

UPU, e-retailer associations, large eretailers and market places (e.g. Alibaba, eBay) 

Time series data on inbound flows of e-commerce 

parcels 

E-retailer associations, global integrators (e.g., DHL, UPS) large e-retailers 

and market places (e.g., Alibaba, eBay) 

Data on changes in terminal dues UPU 

Gravity model 

estimations 

Cross-country panel data on bilateral flows of ecommerce packets/letter mail 

UPU, e-retailer associations, large eretailers and market places (e.g. Alibaba, eBay) 

Cross-country panel data on other explanatory 

variables, such as distance, internet penetration, 

language, delivery options etc. 

Depends on characteristics included in 

the model. 

Terminal dues and development in terminal dues UPU 

Price for domestic last-mile activities National postal operators 

Source: Copenhagen Economics 

Transfers between postal operators 

Under-compensation of last-mile costs implies a transfer of money from high-cost designated operators to low-cost designated operators. This problem is solved if the terminal 

dues equal the price for last-mile handling of domestic letters. 

Table 29 presents the framework for measuring transfers between postal operators created by the current UPU system for terminal dues. 

Table 29 Measuring transfers between postal operators 

 Questions to answer Answer/method to find answer 

What would the non-distortive terminal dues 

rate be? ⋅ Price of last-mile handling of domestic letter post items 

How would delivery operators, senders and 

recipients react to the new rate? ⋅ Assume no change in demand 

Which volumes are potentially affected by the 

distortion? 

⋅ All volumes subject to terminal dues

⋅ Calculate difference between terminal dues and prices for 

last-mile handling of domestic letters 

Source: Copenhagen Economics 

One could imagine that the demand for cross-border letters would change as the level of 

terminal dues change. We have discussed this in relation to the previous distortions. For 

the purpose of isolating the effect on financial transfers between delivery operators, we 

assume that demand remains constant. This would indeed be the case if terminal dues do 

not affect the retail letter post tariffs paid by mailers. In this situation, a change in the 

terminal dues system would in any case influence the financial position of postal operators, given their bilateral mail flows. This would happen via two channels: import and 

export of cross-border letter post items. 

For import volumes, the financial effect for a specific postal operator would equal the 

change in terminal dues charged times the volume of inbound cross-border letter post 

items. The effect will be positive if current terminal dues are below domestic prices for 
Final report 

98 

last-mile activities. For export volumes, the financial effect would equal the change in the 

terminal dues for the export basket (i.e., containing a mix of export countries) multiplied 

by the volume of outbound cross-border letter post items. 

In the counterfactual situation, terminal dues will most likely increase in some countries 

and decrease in others. This means that the net effect on the export side will depend on 

the mix of countries in the export basket. However, since most international mail volumes 

are sent to industrialized countries (cf. chapter 1) and since terminal dues in these countries often are capped at a rather low level, one could expect that the weighted terminal 

dues for export mail would increase for most countries in the counterfactual. 

The net effect for a postal operator will thus to a large extent depend on whether the operator is a net importer or a net exporter of mail, although the relative change in terminal 

dues for import and export mail also will have an impact (Table 30). 

Table 30 Effect of changes in terminal dues 

Net exporter Net importer 

Relative increase in terminal dues (import terminal dues 

increase more than export terminal dues) Net effect unclear Net gain 

Relative decrease in terminal dues (import terminal dues 

increase less than export terminal dues) Net loss Net effect unclear 

Source: Copenhagen Economics 

Box 13 provides an example of how the transfer effect of terminal dues can be calculated 

in practice. 
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Box 13 Estimating transfers between delivery operators 

The calculation of transfers between postal operators is divided into two parts: import of crossborder letter post items and export of cross-border letter post items. 

For imports, the first step is to collect data on all inbound cross-border items subject to terminal 

dues. The necessary data contains volumes, countries of origin, and terminal dues received. The 

second step is thereafter to calculate the counterfactual terminal dues (i.e., the price for last-mile

handling of domestic items) that the operators would have received, given the import flows. The 

third step is to calculate the difference between the terminal dues actually received for imported 

letter post items and the counterfactual terminal dues that would have been charged in the optimal situation. This calculation should be conducted for all inbound letter post flows and for all designated operators applying the UPU system of terminal dues. 

The exercise is very similar for exported letter post items, where the first step is to collect data on 

all outbound cross-border flows subject to terminal dues. The necessary data contains volumes, 

countries of destination, and terminal dues paid. The second step is to calculate the counterfactual 

terminal dues (i.e., the price for last-mile handling of domestic items in the destination countries) 

that the operators would have paid, given the export flows. The third step is to calculate the difference between the terminal dues paid for export letter post and the counterfactual terminal dues 

that would have been paid in the optimal situation. This calculation should be conducted for all 

outbound letter post flows and for all designated operators applying the UPU system of terminal 

dues. 

The net effect per operator is calculated by adding the effects on the import and on the export 

side. 

The table below provides a simple two-country (X and Y) example of this exercise. 

Import distortion country X 

 Average import terminal due per item for letter post items from country Y 0.5 

 Average price for last-mile activities per item of relevant domestic product in X 0.7 

 Average loss/gain per imported letter post item from country Y -0.2 

 Yearly volume of imported letter post items from Country Y (m) 500 

 Total transfer from X to Y (m) -100

Export distortion country X 

 Average export terminal due for letter post items to country Y 0.5 

 Average price for last-mile activities per item of relevant domestic product in Y 0.9 

 Average loss/gain per exported letter post item to country Y 0.4 

 Yearly volume of exported letter post items from Country Y (m) 500 

 Total transfer from Y to X (m) 200

 

In this case, the current terminal dues system results in a transfer of 100 from country Y to country X. In contrast, the optimal situation would have no transfer at all. 

Source: Copenhagen Economics 
Final report 

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Previous research has provided estimations similar to the one described above based on 

an assumption that ideal and non-distortionary terminal dues rates equal 80 percent of 

the domestic list price for a single piece letter. Based on this framework, the total transfer 

from net “winners” to net “losers” within group 1.1 has been estimated to about 418 million USD (corresponding to 0.3 percent of revenues generated in the European postal 

sector). 96 

The model used in previous research, its main assumptions, and most important drawbacks are discussed in Box 14. 

 

96 Campbell (2014) 
Final report 

101 

Box 14 Previous estimations of transfers between operators 

Transfers between delivery operators have been estimated in a number of previous publications, 

primarily developed by James I Campbell Jr. Due to restrictions regarding data availability, the estimations have so far focused on the exchange of letter post among the 34 member countries of 

the OECD and mail exchanges between OECD and non-OECD countries. The method used for calculating transfers between operators consists of four steps: 

1. Estimate letter post flows and mail profiles 

2. Estimate UPU terminal dues 

3. Estimate “non-distortive” terminal dues 

4. Compare net payments with actual vs. with “non-distortive” terminal dues 

Estimation of letter post flows and mail profiles 

Due to the lack of bilateral data on mail flows, the model assumes a close correlation of export international mail flows with export of commodities and services. Bilateral mail flows are approximated based on OECD data on export trade. Moreover, 80 percent of international mail exported 

from industrialized countries is assumed to be destined for another industrialized country. All letter

post items of unknown origin are assumed to originate from mailers in industrialized countries. 

Developing countries are assumed to receive twice as much mail as they send to industrialized 

countries. By not allowing for any impact of terminal dues on mail flows, the model does not capture the entire distortion created by terminal dues (e.g., distortions of global mail and trade flows;

distortion of competition). 

Estimation of UPU terminal dues 

The model calculates terminal dues payments between designated postal operators based on UPU 

rates. It assumes that all countries apply UPU rates to all bilateral transactions. This does not reflect reality. As the authors acknowledge, several postal operators (especially in Europe) use other 

agreements for cross-border letters (notably REIMS, but also bilateral agreements). 

Estimation of “non-distortive” terminal dues 

For letter post items delivered by operators in industrialized countries, “non-distortive” terminal 

dues are assumed to equal 72 percent of the end-to-end delivery price for domestic single-piece 

letters. For letter post items delivered in developing countries, terminal dues are assumed to equal 

92 percent of the domestic single-piece letter postage. 

As the authors acknowledge, the assumption that the cost of last-mile handling of cross-border 

mail can be approximated by 72 percent of the price for domestic end-to-end delivery of single 

piece letters is not necessarily correct. A study about postal operators’ pricing behaviour, conducted on behalf of the European Commission in 2011, found that single piece items (on average) were 

priced over 45 percent higher than transactional bulk mail, which in turn was priced almost 50 percent higher than direct mail. This suggests that a 28 percent discount on single piece tariffs may 

not be enough to reflect the cost of last-mile handling of cross-border letters. 

Comparison of net payments with actual vs. with “non-distortive” terminal dues 

Net payments are compared for the situations (i) with current UPU terminal dues and (ii) with 

counterfactual terminal dues. The difference between the two scenarios is considered a distortive 

transfer between postal operators. Within group 1.1, the transfer from net “winners” to net “losers” has been estimated to about 315 million Euros.

Note: In a subsequent paper In a subsequent paper presented in March 2014, Campbell presented the

results of a more sophisticated version of this model using modified assumptions, more recent input 

date, and the terminal dues agreed by the UPU in 2012. 

Source: Campbell, Dieke, Zauner (2011), “Terminal dues: Winners, losers, and the path to reform”; Campbell 

(2014), “Estimating the Effects of UPU terminal Dues 2014-2017” 
Final report 

102 

The data necessary for measuring the distortions are summarized in Table 31. 

Table 31 Data for measuring transfers between postal operators

 Data requirement Data source 

Bilateral letter flows National postal operator, UPU, or national 

regulator 

Terminal dues (paid on exported letters and received on imported letters) National postal operators

Price for last-mile handling of bulk letters National postal operators

Source: Copenhagen Economics 

4.4 Measuring economy-wide effects of identified distortions 

A suitable tool for measuring the economy-wide effects of the most important distortions 

created by the current system of terminal dues could be a computable general equilibrium 

model (CGE model). The model could incorporate distortions created by terminal dues as 

(i) increased costs of producing delivery services (driven by a distortion of competition) 

and (ii) non-tariff barriers (equivalent to the terminal dues). 

CGE models offer a comprehensive way of modelling the overall impact of policy changes 

on the economy and are often used by global institutions such as the World Bank. The 

models incorporate many economic linkages and can be used to try to explain medium- to 

long-term trends and structural responses to policy changes. 

A general equilibrium model for trade analysis could calculate the overall economic gains 

of restructuring the UPU terminal dues system. Examples of results from the model include effects on total welfare, prices of services, import and exports, output, employment, 

and GDP. All results can be reported by production sector and country, where relevant. 

The model would capture both the direct effects on sectors targeted and the indirect effects on their suppliers, consumers and competitors. Therefore, the model is suitable for 

answering questions like how much the total cost of the distortionary effect of the current 

terminal dues system would be when taking all spill-over effects into account. 

The CGE model represents a set of regions, which is connected via international trade in 

goods and services. The model includes most countries in the world but smaller countries 

are normally aggregated into a single region that is labelled “Rest of the World”. Each of 

the regions has a representative consumer, a government and a production sector for each 

of the goods and services in the model. 

Figure 22 gives an overview of the markets, the agents and the flows of goods, services 

and factors in a standard CGE trade model. 
Final report 

103 

Figure 22 Example: CGE trade model 

Source: Copenhagen Economics 

Firms producing goods and services represent the supply side of the model. All goods and 

services are being produced with materials and primary factors capital, land and labour. A 

representative agent represents final demand and he finances his consumption with income from sales of capital, land and labour. Finally, a government provides public goods 

financed through taxes and duties. 

The modelling approach for services builds on recent economic literature, which suggests 

that close availability of a diverse set of services is important to economic growth. The key 

idea is that users (firms, governments and households) benefit from a diverse set of services in that more varieties allow the users to purchase a quality adjusted unit of services 

at lower the costs. The model is therefore able to calculate the effects of differentiation 

and customisation of services and their implications for investments and trade in services. 

The model also captures that firms use services as intermediate inputs and that lower 

costs of inputs lower the prices of services. Thus, lower prices of services not only benefit 

the firms purchasing the services but also firms, government and households purchasing 

their output. The model therefore captures the economy-wide effects of barriers to services trade. In this way, the CGE model can analyse how terminal dues spill over to prices 

for cross-border delivery of letter post items and prices for cross-border e-commerce. 

The CGE model represents barriers to services trade in several ways depending on the 

nature of the barrier. The model incorporates the barriers as price wedges and the size of 

the wedges are typically based on estimates of the implications for prices found in detailed micro-studies. For example, if the barrier implies that services trade requires extra 

labour and capital, the model increases the costs of service provision by adding extra costs 

of labour and capital to the relevant services activities. 

In the context of terminal dues, distortion of competition for first-mile and/or last-mile 

activities caused by terminal dues could result in less efficient (higher cost) production of 

cross-border delivery services (part of the communication sector). The distortion of competition could thus be included in the model as an increase in the cost of communication. 

Exports

Domestic 

Markets

Production

Government

Private 

households

Other 

regions

Capital

Low-skilled labour

High-skilled labour

Intermediate

inputs

Imports

Consumption Consumption

Transfers

Taxes

Exports

Domestic 

Markets

Production

Government

Private 

households

Other 

regions

Capital

Low-skilled labour

High-skilled labour

Intermediate

inputs

Imports

Consumption Consumption

Transfers

Taxes
Final report 

104 

Alternatively, if the price increase is difficult to attribute to one or a few factors, barriers 

can be represented as tariff-equivalents analogous to the way non-tariff barriers typically 

are incorporated for goods trade. In the context of terminal dues, the distortion of global 

mail and trade flows (caused by discriminatory and sometimes too low terminal dues) can 

be included in the model as non-tariff barrier equivalent to the terminal dues. 

Policy scenarios are implemented via changes in the barriers. For example, a scenario can 

partially or completely remove the extra costs of capital and labour associated with a given barrier, or it can reduce the tariff-equivalent. In the context of terminal dues, the optimal solution suggested in chapter 3 (terminal dues equal to the price for last-mile handling of domestic letter post items) could have the following implications for the model: 

 Cost of service production is reduced (due to increased competition and higher 

efficiency) 

 Non-tariff barriers increase for countries where terminal dues increase and decline for countries where terminal dues decline 

The basic steps in the methodology behind the simulations in all scenarios are: 

1. Implement information in the model 

2. Simulate the baseline scenario 

3. Program the model to be able to simulate variants of the policy options. The difference between the baseline scenario and the economic outcomes in these scenarios measures the economic effect of each modelled option. 

Due to the fact that the CGE model uses the GTAP database to model effects at a fairly 

aggregated sector level (postal services belonging to the communications sector), the 

modelling will rely on a number of assumptions, e.g., regarding the share of communications sector production value affected by terminal dues. Nevertheless, the CGE model has 

previously been successfully applied to the postal sector to estimate the economy-wide 

effects of changes in the VAT rules applied to the public sector in EU member states.97

 

Table 32 shows how a CGE model might be applied to the case of terminal dues. As shown 

in the table below, a CGE model would most likely be able to capture five of the six effects 

identified in chapter 3. As discussed earlier, the transfers between postal operators will 

only have an impact on the wider economy in case they spill over to higher taxes or higher 

prices paid by users of delivery services. The likelihood of this being the case is highly 

uncertain and the benefit of including this effect in the model would thus be very small. 

 

97 See Copenhagen Economics (2013), VAT in the public sector and exemptions in the public interest. Report conducted on 

behalf of the European Commission, DGTAXUD. Report available at 

http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_public_sector_exemptio

ns_en.pdf 
Final report 

105 

Table 32 Application of a CGE model to terminal dues 

 Distortion Variable in the CGE model Effect of implementation of ideal system

Competition for last-mile 

activities 

Cost of communications 

service provision 

Increased competition leads to lower cost 

providing communications services

Competition for first-mile 

activities 

Cost of communications 

service provision 

Increased competition leads to lower cost 

providing communications services

Demand for packets vs. 

parcels 

Cost of communications 

service provision 

Increased competition leads to lower cost 

providing communications services

Global mail and trade flows, 

domestic vs. cross-border 

Non-tariff barrier on communications services Increased terminal dues leads to less trade, 

reduced terminal dues leads to more trade

Global mail and trade flows, 

target vs. transition origin 

Non-tariff barrier on communications servicesIncreased terminal dues leads to less trade, 

reduced terminal dues leads to more trade

Source: Copenhagen Economics 
Final report 

106 

References 

Adrenale Corporation, 2010, “Report: Market Research on International Letters and Lightweight Parcels 

and Express Mail Service Items,” Universal Postal Union website 

Australia Post, 2011, “Productivity Commission Retail Inquiry Draft Report: Australia Post Response” 

Baratta, Rosario, 2004, “The REIMS II exemption decision: enhancing competition in the cross-border 

mail market through third party access,” Competition Policy Newsletter

Buiges, Pierre A., Rosario Baratta, Dag Johansson, and Suzette Schiff, 2003, “The cross-border mail market in the EU: economic context and competition concerns,” Third Conference on “Regulation, Competition and Universal Service in the Postal Sector,” Toulouse 

Campbell, Dieke, Zauner, 2011, “Terminal Dues: Winners, Losers, and the Path to Reform” 

Campbell, James I., 1996, Report to the Chairman, Subcommittee on the Postal Service, Committee on 

Government Reform and Oversight, House of Representatives, “US Postal Service: Unresolved Issues in 

the International Mail Market,” Appendix I, Summary of Terminal Dues 

Campbell, James I., 1997 “Evolution of the Postal Function in Long Distance Markets” 

Campbell, James I., 1998 “Comment on REIMS II Terminal Dues Agreement” 

Campbell, James I., 2002, “History of terminal dues and related issues,” The Liberalisation of Postal Services in the European Union 

Campbell, James I., 2014, “Estimating the effects of UPU terminal dues 2014-2017” (presentation and 

paper) 

Campbell, James I., Alex Kalevi Dieke, Martin Zauner, 2010, “Study on the External Dimension of the EU

Postal Acquis,” WIK-Consult 

Commission for Communications Regulation, 2003, “Information Notice: Terminal Dues Agreements—

Compliance with Regulation 10(1) of S.I. 616 of 2002” 

 
Final report 

107 

Copenhagen Economics, 2012, Pricing behaviour of postal operators, conducted on behalf of the European Commission’s directorate for the Internal Market and Services (DGMARKT). 

European Commission, 1996, “Notification of an agreement on terminal dues (Reims) between postal 

operators” 

European Commission, 2009, Guidance on the Commission's enforcement priorities in 

applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings 

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Free & Fair Post, 2012, “FFPI Contribution to the consultation on the ERGP Report on ‘Access’ to the 

postal network and elements of postal infrastructure” 

Geradin, Damien, 2012, “Legal opinion on the compatibility of the proposed target system for terminal 

dues with EU law” 

Ghosal, Vivek, 1999, “Competition in International Postal Markets: Should the Universal Postal Union’s

Anti-Remail Provisions Be Repealed?” 

Haller, Andreas, Christian Jaag, and Urs Trinkner, 2012, “Termination Charges in the International Parcel Market,” Swiss Economics Working Paper 

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for the period 2014-2017,” 25th Universal Postal Union Congress 

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of Change in Postal Liberalization?” in Regulatory and Economic Challenges in the Postal and Delivery 

Sector, ed. Michael Crew and Paul Kleindorfer 

Miller, T., D. Booth, D. Delehanty, and H. Von Behren, 2004, “Public meeting on UPU Issues: Results of

the 2004 Bucharest UPU Congress,” US Department of State website 

Office for Publications of the European Union, European Commission, 2012, Case No COMP/M.6503 – 

LA POSTE/SWISS POST/JV Commission decision pursuant to Article 6(1)(b) in conjunction with Article 

6(2) of Council Regulation No 139-2004 

Pan African Postal Union, “Member Countries” and “Mission Vision & Strategic Objective,” PAPU website 
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Pan African Postal Union, 2012, “Terminal Dues,” PAPU website 

PostNL, “International postal regulation,” PostNL website 

Regan, Michael J., Director, International Postal Affairs, US Postal Service, 1999 letter to Ambassador 

Southwick, Bureau of International Organization Affairs, “Time frame for terminal dues proposals, US 

Postal Service Analysis, Impact on US mailers, and Recommendation” 

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for Terminal Dues” 

Sorensen, Janet M., 2014, “International Terminal Dues White Paper,” Office of Inspector General, United States Postal Service 

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wholesale market,” Swiss Post website 

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dues system for 2018-2021” 

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http://www.upu.int/uploads/tx_sbdownloader/actInFourVolumesLetterPostManualEn.pdf 

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2014 

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the Advisory Committee on International Postal and Delivery Services 
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US Postal Regulatory Commission, 2011, “Order Approving an Additional Inbound Market Dominant 

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Final report 

110 

Appendix 

A.1 Terminal dues rates: Universal Postal Union 

Table A.1 Terminal dues rates (SDR): Universal Postal Union 

2014 2015 2016 2017 

Group Pays Cap Floor Cap Floor Cap Floor Cap Floor 

1.1 To other 

target countries1 

0.294 

per 

item, 

2.294 

per 

kilogram 

0.203 

per 

item, 

1.591 

per 

kilogram 

0.303 

per 

item, 

2.363 

per 

kilogram 

0.209 

per 

item, 

1.636 

per 

kilogram 

0.312 

per 

item, 

2.434 

per 

kilogram 

0.215 

per 

item, 

1.682 

per 

kilogram 

0.321 

per 

item, 

2.507 

per 

kilogram 

0.221 

per 

item, 

1.729 

per 

kilogram 

1.2, 2 To other 

target countries1

0.209 

per 

item, 

1.641 

per 

kilogram 

0.203 

per 

item, 

1.591 

per 

kilogram 

0.222 

per 

item, 

1.739 

per 

kilogram 

0.209 

per 

item, 

1.636 

per 

kilogram 

0.235 

per 

item, 

1.843 

per 

kilogram 

0.215 

per 

item, 

1.682 

per 

kilogram 

0.249 

per 

item, 

1.954 

per 

kilogram 

0.221 

per 

item, 

1.729 

per 

kilogram 

3, 4, 5 Everyone2 Flat rate: 0.203 

per item, 1.591 

per kilogram 

Flat rate: 0.209 

per item, 1.636 

per kilogram 

0.215 per item, 

1.682 per kilogram 

0.221 per item, 

1.729 per kilogram 

3, 4, 5 Everyone3 4.162 per kilogram 4.192 per kilogram 4.311 per kilogram 4.432 per kilogram

 

Note: 1 Country-specific rates based on 70% of domestic tariffs for a 20-gram priority small letter (P) and a 

175-gram priority large letter (G). 2 Per item and per kilogram rate for exchanges of 75 tons per year 

or more. 3 Per kilogram rate for all exchanges of less than 75 tons per year. 

 The rates applied for flows between countries in the target system in a given year shall not lead to an 

increase of more than 13% in the base terminal dues revenue before quality of service adjustment for 

a letter-post item of 81.8 grams, compared to the previous year. For flows under 75 tons per year between countries in the target system as from 2010 and between these countries and countries in the 

target system prior to 2010, the per kilogram and per item components are converted into a total rate 

per kilogram on the basis of the average of 12.23 items per kilogram. 

Source: Universal Postal Union 2013, “Statistics and Accounting Guide” 

A.2 Classification of countries and territories for terminal dues and Quality of Service Fund (QSF) purposes 
Final report 

111 

Table .2 Universal Postal Union classification of countries and 

territories for terminal dues and Quality of Service Fund 

Group Countries and territories Postal Development Index 

(PDI) 

1.1 Australia 0.421

Austria 0.623

Belgium 0.576

Canada 0.402

Denmark 0.669

Greenland 0.229

Finland 0.576

France 0.558

French Polynesia 0.346

New Caledonia 0.226

 Wallis and Futuna Islands 0.034 

Germany 0.602

United Kingdom of Great Britain and Northern Ireland 0.499

Guernsey 0.545

Isle of Man 0.627

Jersey 0.729

Falkland Islands (Malvinas) 0.299

Gibraltar 0.447

Pitcairn Islands 0.149

Greece 0.268

Iceland 0.323

Ireland 0.468

Israel 0.317

Italy 0.381

Japan 0.498

Luxembourg 0.833

Netherlands 0.578

New Zealand 0.336

Norway 0.927

Portugal 0.277

San Marino 0.672

Spain 0.347

Sweden 0.556

Switzerland 0.829

United States of America 0.575

Norfolk Island n/a

Faroe Islands n/a

Tristan da Cunha n/a

 Liechtenstein n/a 

Monaco n/a

Vatican n/a

Group 1.2 Aruba 0.285

Bahamas 0.316

Hong Kong 0.347

Kuwait 0.474

Anguilla 0.267

Bermuda 0.857

 British Virgin Islands 0.540 

Cayman Islands 0.728

Turks and Caicos Islands 0.377

Qatar 0.598

Singapore 0.445

Slovenia 0.394

United Arab Emirates 0.495

Group 2 Antigua and Barbuda 0.151

Bahrain (Kingdom) 0.190

Barbados 0.165

Brunei Darussalam 0.310

Croatia 0.175

Curaçao 0.237

Cyprus 0.309

Czech Rep. 0.303

Dominica 0.104

Estonia 0.223

Grenada 0.174
Final report 

112 

Hungary 0.210

Korea (Rep) 0.254

Latvia 0.148

Macao 0.375

Malta 0.271

Cook Islands 0.153

Montserrat 0.142

Poland 0.161

Saint Christopher (St. Kitts) and Nevis 0.131

Saudi Arabia 0.149

 Sint Maartin 0.237 

Slovakia 0.215

Trinidad and Tobago 0.174

Group 3 Argentina 0.079

Belarus 0.091

Bosnia and Herzegovina 0.058

Botswana 0.059

Brazil 0.117

Bulgaria (Rep.) 0.076

Chile 0.096

China (People's Rep.) 0.073

Costa Rica 0.065

Cuba 0.063

Fiji 0.067

Gabon 0.065

Jamaica 0.070

Kazakhstan 0.068

Lebanon 0.079

Libya 0.108

Lithuania 0.135

Malaysia 0.106

Mauritius 0.098

Mexico 0.081

Montenegro 0.078

Nauru 0.107

Niue 0.051

Oman 0.173

Panama (Rep.) 0.064

Romania 0.088

Russian Federation 0.093

Saint Lucia 0.102

Saint Vincent and the Grenadines 0.072

Serbia 0.077

Seychelles 0.108

South Africa 0.076

Suriname 0.053

Thailand 0.066

the former Yugoslav Republic of Macedonia 0.056

Turkey 0.097

Ukraine 0.055

Uruguay 0.092

Venezuela (Bolivarian Rep.) 0.099

Group 4 Albania 0.037

Algeria 0.040

Armenia 0.029

Azerbaijan 0.046

Belize 0.037

Bolivia 0.015

Cameroon 0.013

Cape Verde 0.030

Colombia 0.048

Congo (Rep.) 0.018

Côte d'Ivoire (Rep.) 0.014

Dem People's Rep. of Korea 0.012

Dominican Republic 0.042

Ecuador 0.034

Egypt 0.022

El Salvador 0.034

Georgia 0.023

Ghana 0.015

Guatemala 0.026

Guyana 0.025
Final report 

113 

Honduras (Rep.) 0.015

India 0.017

Indonesia 0.027

Iran (Islamic Rep.) 0.047

Iraq 0.020

Jordan 0.040

Kenya 0.015

Kyrgyzstan 0.010

Maldives 0.051

Moldova 0.032

Mongolia 0.016

Morocco 0.034

Namibia 0.043

Tokelau 0.017

Nicaragua 0.017

Nigeria 0.010

Ascension 0.036

St Helena 0.025

Pakistan 0.012

Papua New Guinea 0.015

Paraguay 0.022

Peru 0.039

Philippines 0.020

Sri Lanka 0.032

Swaziland 0.044

Syrian Arab Rep. 0.023

Tajikistan 0.009

Tonga 0.046

Tunisia 0.052

Turkmenistan 0.039

Samoa 0.038

Uzbekistan 0.013

Viet Nam 0.024

Zimbabwe 0.005

Group 5 Afghanistan 0.003

Angola 0.032

Bangladesh 0.008

Benin 0.009

Bhutan 0.019

Burkina Faso 0.004

Burundi 0.002

Cambodia 0.006

Central African Rep. 0.003

Chad 0.005

Comoros 0.021

Democratic Republic of the Congo 0.001

Djibouti 0.012

Equatorial Guinea 0.122

Eritrea 0.005

Ethiopia 0.004

Gambia 0.006

Guinea 0.043

Guinea–Bissau 0.004

Haiti 0.006

Kiribati 0.026

Lao People's Dem. Rep. 0.008

Lesotho 0.011

Liberia 0.001

Madagascar 0.003

Malawi 0.008

Mali 0.004

Mauritania 0.007

Mozambique 0.003

Myanmar 0.012

Nepal 0.008

Niger 0.002

Rwanda 0.011

Sao Tome and Principe 0.018

Senegal 0.009

Sierra Leone 0.002

Solomon Islands 0.013

Somalia 0.000
Final report 

114 

South Sudan .

Sudan 0.010

Tanzania (United Rep.) 0.005

Timor-Leste (Dem. Rep.) 0.018

Togo 0.008

Tuvalu 0.054

Uganda 0.006

Vanuatu 0.023

Western Samoa 0.031

Yemen 0.009

Zambia 0.010

Palestine 0.017

Note: Palestine has observer status within the UPU by virtue of resolution C 115/1999 of the Beijing Congress. Maldives and Tunisia were reclassified in Group 4 by the 2013 CA. Latvia has voluntarily acceded to the target system as of 1 January 2014, as a Group 2 country. Specifically concerning the case 

of the United Arab Emirates, regardless of the provisions in the methodology for the classification of

countries for the 2014-2017 period, Congress decided to allow that country to apply the same terminal dues rates as countries classified in Group 3 for the cycle 2014-2017, with that country applying 

the provisions pertaining to countries in Group 1.2 for the purposes of the Quality of Service Fund and 

the terminal dues link to quality of service. 

Source: UPU 2013 “Statistics and Accounting Guide”

A.3 Sources included in the screening of previous literature (49 in total) 

4. Adrenale Corporation, 2010, “Report: Market Research on International Letters 

and Lightweight Parcels and Express Mail Service Items,” Universal Postal Union 

website 

5. Australia Post, 2011, “Productivity Commission Retail Inquiry Draft Report: Australia Post Response” 

6. Baratta, Rosario, 2004, “The REIMS II exemption decision: enhancing competition in the cross-border mail market through third party access,” Competition 

Policy Newsletter

7. Buiges, Pierre A., Rosario Baratta, Dag Johansson, and Suzette Schiff, 2003, “The 

cross-border mail market in the EU: economic context and competition concerns,” Third Conference on “Regulation, Competition and Universal Service in 

the Postal Sector,” Toulouse 

8. Campbell, James I., Alex Kalevi Dieke, and Martin Zauner, 2011, “Terminal Dues: 

Winners, Losers, and the Path to Reform” 

9. Campbell, James I., “Comment on REIMS II Terminal Dues Agreement” (1998) 

and “Evolution of the Postal Function in Long Distance Markets” (1997), Collected 

Papers on Specific Postal Policy Issues, 2006 

10. Campbell, James I., 2014, “Estimating the effects of UPU terminal dues 2014-

2017” (presentation and paper) 

11. Campbell, James I., Alex Kalevi Dieke, Martin Zauner, 2010, “Study on the External Dimension of the EU Postal Acquis,” WIK-Consult

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13. Campbell, James I., 1996, Report to the Chairman, Subcommittee on the Postal 

Service, Committee on Government Reform and Oversight, House of Representa-
Final report 

115 

tives, “US Postal Service: Unresolved Issues in the International Mail Market,” 

Appendix I, Summary of Terminal Dues 

14. Commission for Communications Regulation, 2003, “Information Notice: Terminal Dues Agreements—Compliance with Regulation 10(1) of S.I. 616 of 2002” 

15. European Conference of Postal and Telecommunications Administrations, 

“CEPT,” CEPT website 

16. European Conference of Postal and Telecommunications Administrations and the 

Regional Commonwealth in the Field of Communications, 2002. “Memorandum 

of Understanding” 

17. European Union, European Commission, 1996, “Notification of an agreement on 

terminal dues (Reims) between postal operators” 

18. Free & Fair Post, 2012, “FFPI Contribution to the consultation on the ERGP Report on ‘Access’ to the postal network and elements of postal infrastructure” 

19. Geradin, Damien, 2012, “Legal opinion on the compatibility of the proposed target system for terminal dues with EU law” 

20. Ghosal, Vivek, 1999, “Competition in International Postal Markets: Should the 

Universal Postal Union’s Anti-Remail Provisions Be Repealed?” 

21. Haller, Andreas, Christian Jaag, and Urs Trinkner, 2012, “Termination Charges in 

the International Parcel Market,” Swiss Economics Working Paper 

22. International Post Corporation, “Managing intercompany pricing,” IPC website 

23. Joint Council of Administration and Postal Operations Council report, 2012, 

“UPU terminal dues system for the period 2014-2017,” 25th Universal Postal Union Congress 

24. Legal Information Institute, 2006, “39 US Code Section 3622: Modern rate regulation” (pertaining to the US Postal Service) and “39 US Code Section 407: International postal arrangements” 

25. Leong, Joy M., Daniel Bahar, and Dimosthenis Papakrivopoulos, 2005, “ETOEs—

Arbitrageurs or Vehicles of Change in Postal Liberalization?” in Regulatory and 

Economic Challenges in the Postal and Delivery Sector, ed. Michael Crew and 

Paul Kleindorfer 

26. Miller, T., D. Booth, D. Delehanty, and H. Von Behren, 2004, “Public meeting on 

UPU Issues: Results of the 2004 Bucharest UPU Congress,” US Department of 

State website 

27. Office for Publications of the European Union, European Commission, 2012, Case 

No COMP/M.6503 – LA POSTE/SWISS POST/JV Commission decision pursuant 

to Article 6(1)(b) in conjunction with Article 6(2) of Council Regulation No 139-

2004 

28. Pan African Postal Union, “Member Countries” and “Mission Vision & Strategic 

Objective,” PAPU website 

29. Pan African Postal Union, 2012, “Terminal Dues,” PAPU website 

30. PostNL, “International postal regulation,” PostNL website 

31. Regan, Michael J., Director, International Postal Affairs, US Postal Service, 1999 

letter to Ambassador Southwick, Bureau of International Organization Affairs, 

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US mailers, and Recommendation” 

32. Somers, Managing Director, Belgian Post International, 2010, “Need for a Clearer 

Regulatory Framework for Terminal Dues” 
Final report 

116 

33. Sorensen, Janet M., 2014, “International Terminal Dues White Paper,” Office of 

Inspector General, United States Postal Service 

34. Swiss Post, “Network Access Partnership: Swiss Post International’s product 

range for the cross-border wholesale market,” Swiss Post website 

35. Universal Postal Union, 2013, “Statistics and Accounting Guide” 

36. Universal Postal Union, 2013, Terminal dues impact assessment tool 

37. Universal Postal Union, 2012, CEP 2012.1—Doc 12c.Add 1.Rev 1.Annexe 3, “Future work on the terminal dues system for 2018-2021” 

38. Universal Postal Union, 2014, “Global or regional estimates,” Administrations, 

UPU website 

39. Universal Postal Union, 2013, “Development of postal services in 2012: A few key 

preliminary figures,” UPU website 

40. Universal Postal Union, 2013, “Annual Report 2012: Setting the stage,” UPU website 

41. Universal Postal Union, “About terminal dues and transit charges,” UPU website 

42. US Department of State, 2011, “Work of the UPU Councils—October 2010 to April 

2011,” Presentation to the Advisory Committee on International Postal and Delivery Services 

43. US Postal Regulatory Commission, 2013, “Annual Report to the President and 

Congress: Fiscal Year 2013” 

44. US Postal Regulatory Commission, 2013, “Order Approving an Additional Inbound Market Dominant Multi-Service Agreement with Foreign Postal Operators 

Negotiated Service Agreement (with Canada Post Corporation)” 

45. US Postal Regulatory Commission, 2013, “Order Approving an Additional Inbound Market Dominant Multi-Service Agreement with Foreign Postal Operators 

Negotiated Service Agreement (with Korea Post)” 

46. US Postal Regulatory Commission, 2013, “Order Approving an Additional Inbound Market Dominant Multi-Service Agreement with Foreign Postal Operators 

Negotiated Service Agreement (with Australian Postal Corporation)” 

47. US Postal Regulatory Commission, 2012, “Public Representative Comments on 

Postal Service Notice Concerning Bilateral Agreement with Singapore Post Limited Negotiated Service Agreement” 

48. US Postal Regulatory Commission, 2012, “Public Representative Comments on 

Postal Service Notice Concerning Type 2 Rate Adjustment and Royal PostNL 2013 

Bilateral Negotiated Service Agreement” 

49. US Postal Regulatory Commission, 2011, “Order Approving an Additional Inbound Market Dominant Multi-Service Agreement with Foreign Postal Operators 

Negotiated Service Agreement (with China Post Group)” 

50. US Postal Service, 2013, “Notice of United States Postal Service of Type 2 Rate 

Adjustment and Notice of Filing Functionally Equivalent Agreement” 

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2013),” Study for the European Commission, Directorate General for Internal 

Market and Services 
Final report 

117 

A.4 Overview of screening results 

Table A.3 Overview of screening results 

Source: Copenhagen Economics 

Source 

number Source name

Transfer of 

money 

between 

designated 

postal 

operators

Distortion of 

international 

mail flows

Distortion of 

competition 

for first-mile 

and last-mile 

delivery

Inefficient 

"foreign aid" 

subsidy

Distortion of 

competition 

between eretailers in target 

and transition 

countries

 1 Adrenale Corporation 2010 x x x x 

 2 Australia Post 2011 x 

 3 Baratta 2004 x x x 

 4 Buiges et al. 2003 x x x 

 5 Campbell et al. 2011 x x x 

 6 Campbell 2006 x x 

 7 Campbell 2014 x x 

 8 Campbell et al. 2010 x x x x 

 9 Campbell 2002 x x 

 10 Campbell 1996 x x x 

 14 European Union 1996 x x 

 15 Free & Fair Post 2012 x 

 16 Geradin 2012 x x 

 17 Ghosal 1999 x x x 

 20 Joint Council 2012 x 

 22 Leong et al. 2005 x x 

 23 Miller et al. 2004 x x x 

 27 PostNL website x 

 28 Regan 1999 x 

 30 Sorensen 2014 x 

 49 WIK-Consult GmbH 2013 x x x x x

Total 21 sources n/a 15 13 15 5 1

Percent 

of total 71,43% 61,90% 71,43% 23,81% 4,76%