Measuring the Cost of Universal Service for Posts

Abstract

The recent introduction of legislation designed to reduce the scope of the postal monopoly, in the United States and elsewhere, has sharpened interest in understanding the cost borne by a postal operator when it serves customers at noncompensatory prices.² The measurement of such universal service obligation costs (USO) is directly relevant to the scope of entry restriction. A rationale sometimes employed for granting an exclusive franchise to a postal operator is that such restrictions are necessary to finance the cost of universal service.³ That is, the postal operator is simultaneously charged with serving all customers, irrespective of cost differentials, and allowed, via the exclusive privilege on letter carriage, to charge certain customers prices above cost to fund the mandated lossmaking activities. Since there necessarily exists some vector of prices that eliminates all loss-making mail flows, rendering profitable any flows for which the price is less than the willingness to pay and eliminating the rest, the USO is intimately related to the constraint that postal operators offer services of the same quality at uniform prices, despite cost differences. An additional limit generally placed upon the prices chosen by the postal operator is that the universal services be provided at an “affordable rate.”

The views expressed in this paper are those of the authors and do not necessarily represent those of the United States Postal Service or any other organization. The authors are indebted to Donald Baron for assistance with the calculations.