Abstract
Over the years, the US Postal Service (USPS) has undergone several major legislative overhauls, including the Postal Reorganization Act (PRA) in 1970 and the Postal Accountability and Enhancement Act (PAEA) in 2006. Each change in regulatory regime has had substantial impacts on USPS operations, pricing, strategy, and regulation. Recently, the President’s Task Force on the Unites States Postal System released its report summarizing the recent history of the institution along with a set of recommendations that, put together, may constitute the outline for another round of regime changes, either via legislation or by USPS policy actions. In a previous paper, “An economic model of the regulatory structure created by the PAEA of 2006,” we built a model of the Postal Service embodying the regulatory and pricing structure dictated by the 2006 law. We examined its key elements and their likely impact on the US postal industry, in particular projecting financial instability in the absence of successful cost control. In this paper, we perform a similar exercise, constructing a new model of the Postal Service that reflects the assertions put forth in the Task Force recommendations. We use that model to identify and quantify the key elements of the SBM and draw out the implications for future USPS behavior and results. We calibrate the model to approximate current USPS costs, volumes, and demand sensitivities.
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Notes
- 1.
A firm with declining demand nevertheless can retain considerable market power if intermodal substitution is not sensitive to price (Brennan and Crew 2014).
- 2.
While the Postal Service has profit-making and loss-making activities, it is not at all clear that they can be divided into “urban” and “rural” groupings. For example, there are low-volume loss-making routes in urban areas. The Task Force report adopts this “urban-rural” view without producing any evidence to support it.
- 3.
This refers to plans to make the Federal workforce more like the private sector: performance goals, no across-the-board raises, reduced retirement benefits, and other policy changes. See United States Office of Management and Budget (2018).
- 4.
The existence of scope economies causes the need for simultaneous solution. Otherwise the profit-maximizing price for the Commercial good could be set and the price for the Essential good set subsequently.
- 5.
Not all first-class packages are for medicine, but we still include the total amount and let the balance be our measure of person-to-person parcels.
- 6.
There are no measures available for the degree of economies of scope between the two products, so we drop that term from the numerical analysis.
- 7.
The literature on this topic is vast. For a recent summary of the research in this area, however, see Mayo and Willig (2018).
- 8.
Network costs, by definition, are common costs and are not caused by individual products. This is true whether they are fixed or variable costs. Consider a letter carrier walking from the sidewalk to a customer’s mailbox while carrying two first-class letters, a piece of priority mail, and three marketing flats. The cost of that walk is identical if the first-class mail was removed, or if the priority mail was removed, or if the marketing flats are removed. None of those products are responsible for creating the cost.
- 9.
A similar approach to FDC might argue that all, or most of, the network exists for the acceptance, transportation, and delivery of Essential mail, so all, or nearly all, network costs should be allocated to that product. This approach to FDC completely reverses the avowed goals of the TF of sustainability and support for Essential products. While some might consider this approach to be extreme, it does highlight the fact that FDC costing can produce an extremely wide range of results.
References
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Bradley, M.D., Colvin, J., Perkins, M.K. (2020). Assessing the Recommendations of the President’s Task Force on the Postal Service. In: Parcu, P.L., Brennan, T.J., Glass, V. (eds) The Changing Postal Environment. Topics in Regulatory Economics and Policy. Springer, Cham. https://doi.org/10.1007/978-3-030-34532-7_8
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