Competition and Rate Restructuring for Postal Services

Abstract

Competition has been expanding into Postal services for decades. Potentially more pervasive forms of competition from new electronic media including E-mail, on-line services, and the Internet provided over high speed telecommunications technologies have begun to compete for current “protected monopoly” markets that constitute major sources of contribution to common costs for the Postal Service. Faced with the need to balance inconsistent ratemaking criteria, the Postal Rate Commission (PRC) has frequently rejected United States Postal Service (USPS) arguments that greater reliance on economic rate structure principles and greater pricing flexibility are needed to foster economic efficiency as competition increases. Congressman John M. McHugh recently introduced a bill, the Postal Reform Act of 1996, that would allow the USPS to offer volume discounts for certain postal services and replace current postal regulation with price cap regulation. The bill appears to reflect many of the concerns addressed here: the need for greater recognition of economic principles for setting rate structure; as well as the desirability of alternative regulation and pricing flexibility for competitive services. However, in its present form, it provides pricing flexibility largely for services that have already experienced substantial competitive losses (e.g. express mail and parcel post). In addition, the proposed bill does not adequately address emerging competition for other services, in particular, from the rapidly expanding electronic competitive alternatives that are likely to generate more pervasive competition as changes in telecommunications regulation and technology make electronic media better substitutes for postal services.

¹ The author thanks Michael Crew and Paul Kleindorfer for their thoughtful criticism of earlier drafts of this paper and Christopher Cichoski, Chienyo Fung and Michael Matays for their helpful comments, research and editorial assistance.