Privatization and Universal Service Obligations

Telecommunications, airlines, and postal services have similar economic features. However, they have followed different privatization patterns. While privatization of the universal service provider (USP) is common in telecommunications and airlines, it is by far less frequent in the postal sector. This paper analyzes how the size of the universal service obligation (USO) and the mechanisms traditionally used to finance it have prevented privatization in the postal sector. By using a model of a mixed duopoly, we explain that privatization is inversely related to the cost of public funds for USO transfers and to the size of the USP's reserved area.