Mitchell_RMVancouver.txt

1. INTRODUCTION
In recent years, considerable attention has focused on
increasing competition in the provision of postal services. The
reasoning is that competitive pressure brings about productive
efficiency, efficient price structures, product innovation, and the
elimination of economic rents. Postal administrations, however, are
often under constraints that limit their ability to respond to such
pressure.
Consider the United States Postal Service. It is constrained by
laws and regulations formulated by Congress over more than two
centuries. This political process focused as much on social
considerations as on the kinds of market forces that shape
competitive outcomes. And once made, provisions have tended to
remain. These observations apply, though in somewhat altered form,
even since the
1 Presented at the Conference on Postal and Delivery Economics,
The Center for Research in Regulated Industries at Rutgers
University, Vancouver, Canada, June 710, 2000 2 The writer is
Special Assistant to the Postal Rate Commission, an independent
regulatory agency of the United States Government. The views
expressed herein are his own and do not necessarily represent those
of the Commission or any of its members. Correspondence may be sent
to [email protected].
Postal Reorganization Act of 1970. Specifically, that Act turned
rate making over to an independent Postal Rate Commission, but it
also specified a range of factors to which the Commission must give
weight and it required that certain classification structures of
the past be honored.3
This paper focuses on changes the United States Postal Service
would make if it had the freedom to position itself to withstand
competition in all of its markets. (Crew 1995) After such
adjustment, it might become a sustainable monopoly. If this
occurred, the Service's configuration would be that of a successful
competitor and, at the same time, any benefits from having one
provider would be retained. These benefits include economies of
scale and joint production. No changes of any kind are advocated.
Note that the extent of any changes that would be made is a measure
of the extent of non-market choices that have been allowed by the
protection currently provided.
Creating a competitive environment would involve, at a minimum,
eliminating the Private Express Statutes4 and the mailbox rule.5
Absent these, some portions of the mail stream would attract
3 As discussed below, it required continuation of 5 preferred
subclasses. 4 These statutes are laws that comprise the letter mail
monopoly. 5 The mailbox rule specifies that no one other than the
Postal Service (and the addressee) may put mail into the box. This
rule is part of the United States Criminal Code. No other country
has such a rule. Note that eliminating the rule is not a simple
change and has a downside. In particular: 1) The Postal Service
itself owns and maintains many of the boxes-specifically those
known as "cluster" boxes. 2) Many owners of boxes, particularly
those in apartment complexes and those secured by locks, do not
want to open them to all parties. 3) The ability of the Postal
Inspection Service, or similar replacement agency, to control mail
fraud would be
the attention of competitors. The Postal Service would suffer
financial losses. This could lead to a spiral of rate increases and
further volume losses.
The Postal Service would be better off if it lowered selected
rates and took back some of the lost volume. If it did this, some
of its new competitors would be driven out of business, causing
both investor losses and charges that the government should not be
competing with private enterprise. Such a scenario is not
desirable. A much better approach would be to allow the Postal
Service to make adjustments first.
Accordingly, the setting of this paper is that all protection
will be removed and that the Postal Service is given wide latitude
to make its products and services as uncontestable as possible. And
if it were found to be a sustainable monopoly, one could ask
whether that situation would be better than the one that exists
now. There are at least two reasons why it might. First,
competitive configurations give superior, cost-based signals to
buyers so that the value of the service received is greater.
Second, the Postal Service would have to face real competitive
threats at all times. In fact, some business at the margins would
probably be lost. Therefore, the entire organization would sense on
a regular basis that competitors stand ready to take its customers,
and it would see some customers leaving. Such pressure might not
satisfy those who envision a market with a number of active
reduced if general access to the boxes were allowed. And, many
members of the general population favor the rule because it reduces
the number of people who have
competitors, but having a number of active competitors is not
always a viable option.
The next section discusses general guidelines for the paper. The
third section identifies changes that the Postal Service would make
immediately. Section four looks at how the range of postal products
might change. It points to general directions and is not precise.
The fifth section discusses worksharing and contracting, while the
sixth deals with the general issue of cost recognition in rate
design. It focuses to a considerable extent on weaknesses in the
current state of knowledge. The seventh and eighth sections discuss
costs by destination and by customer. Then the next two discuss
inverse price caps and the benefits of having one government
provider. A conclusion follows.
2. GENERAL GUIDE LINES First, it is necessary to discuss the
framework within which the Postal Service's adjustment process will
be considered.
As noted above, relaxing the Private Express Statutes is the
essential first step. Hiding under the Statutes, however, is a rule
mandating that all bills, statements of account, and personal or
handwritten correspondence, if mailed, must be mailed First Class
(the MBMFC rule). To a much greater degree than is commonly
recognized, this rule is critically important to the functioning of
the Postal Service as it now exists. The MBMFC rule requires a
substantial portion of the mail volume to be sent at high
First-Class rates, instead of at the lower Standard-A rates, even
though the senders may not value the high service levels or the
special features of First Class.6 If the rule were eliminated, the
Postal Service would lose a large portion of its revenue,
immediately, with little or no reduction in cost, and rate
adjustments would have to be made.
As an economic matter, it is possible that much of the MBMFC
mail is high-demand mail, and thus that the rule segments the
market according to demand. In order to continue benefiting from
this split, the Postal Service might try to maintain it, even
without the Statutes. But since rates based on content are seldom
the outcome of competitive forces, such an effort would in all
likelihood fail. What is important to understand is that the MBMFC
rule is fundamental to First Class and Standard A as we know them,
and eliminating it would unleash forces that would lead to a major
restructuring, not to a minor adjustment.
In addition, it seems likely that the Postal Service would be
prohibited from selling below incremental cost, would be required
to preserve some form of universal service,7 and would be permitted
to adjust its service levels. Also, the Postal Service would be
allowed to grant volume discounts and to negotiate contract
rates.
Another question concerns the most effective way to install a
profit motive. In general, the outcome of effective competition
is
overcome by licensing access to the mail box. 6 In addition to
its high service levels, First Class offers free forwarding and is
sealed (legally protected) against inspection. Standard A is
deferrable, without these features, and has a lower rate.
expected to be a normal profit level, with the understanding
that unusually efficient firms might achieve supra-normal profits
for a time. One possibility would be to allow a portion of any
profit to be used for performance bonuses to management, but there
would be reason for concern if high and persistent profits
resulted. Also, there would be concern if monopoly power allowed
certain products to have excessive prices. In order to attenuate
these concerns, it might be reasonable to place price caps on any
de facto monopoly mail categories, particularly any used by small
mailers with no alternatives.8
Within this set of rules, particularly if profits are allowed,
the Postal Service would behave much like a profit-maximizing firm.
Considerable attention would be paid to demand and to prices that
could be charged successfully. In addition, one would expect a
renewed interest in costs for narrow product categories, even for
specific customers.9
If the Private Express Statutes were repealed, it is possible
that Congress would also change the framework for labor
negotiations, especially the no-strike rule and the requirement for
binding arbitration when no agreement is reached through
collective
7 The restriction would be that it must provide some reasonable
level of service on seemingly reasonable terms to all recipients. 8
A regulator might well be required to administer any price caps,
incremental-cost floors, or other restrictions. 9 Note that the
effects of Postal Service adjustments could be substantial and
widespread, not only on mailers who have invested heavily around
the present structure of products and rates, but also on such
competitors as newspapers. Some of these groups would strongly
resist any changes.
bargaining. It might also lift the pay caps on management
salaries. Even without such changes, the Postal Service could
pursue regional wage differentials. For purposes of this paper,
however, it is not necessary to specify a new labor environment.
What is important is that labor negotiations take place within the
framework of a situation where the loss of business to competitors
is an everyday reality. If the Postal Service makes all feasible
changes and the markets are found not to be contestable, it will be
because the economies of scale and joint production, and the
advantages of being an incumbent,10 are larger than any
disadvantages associated with the levels of productivity or
wages.


3. IMMEDIATE CHANGES
With the freedoms and goals described above, there are a number
of changes that the Postal Service would make immediately. First,
it would eliminate the "preferred" categories of mail, all of which
have rates that are below corresponding commercial rates. This
means there would be no separate in-county rates, no separate rates
for classroom material, no separate rates for nonprofit
organizations (which exist both in Periodicals and in Standard A),
no separate rates for Library mail,11 and no separate rates for
Science-of-
10 Other advantages the Postal Service could retain relate to
such things as the payment of taxes, the need for a return on
investment, the right of eminent domain, and immunity from parking
tickets. Congress would have to decide on such issues. 11 Free for
the blind mail would continue to be available only if the
Government continued to provide a subsidy to support it. Also, the
Government might continue special arrangements relating to voter
registration. As long as there is an appropriation, these programs
do not put the Postal Service at a competitive disadvantage.
agriculture mail. Under the rate levels of the most recently
completed rate case, eliminating the preferred categories would
yield about onethird of a billion dollars in additional
revenue.
Second, several special rate arrangements would be discontinued.
Specifically, reduced rates for books would be eliminated, and even
if there were a separate subclass for them, it would not have rates
that are invariant with distance.12 Also, Periodicals would not
receive reduced rates, and any rates that resulted would not depend
on the proportion of advertising content.13 These changes would
increase revenue by another nine-tenths of a billion dollars. These
amounts14 are not large, but competition generally prevents
charging higher rates to some customers in order to fund reduced
rates for others.
The above changes would allow substantial reductions in the
complexity of rates and in the complexity of the data systems,
which in turn would allow improvements in the costs and volumes for
the subclasses that remained.
A third change that would be made immediately concerns the
provisions for parcel mail in Alaska. Presently, as a matter of
policy, senders of parcels to residents in the Alaska Bush (which
is not accessible by surface transportation) pay surface rates for
mail that is transported by air in low volumes. This would not be
done in a
12 The law currently specifies that the rates for books will not
vary with distance. This makes the book subclass very inefficient
at serving those for whom it was established. 13 Under the existing
rate arrangement, the Postal Service can consider externalities in
setting rates. This would not occur in a competitive system.
competitive system. To places where surface transportation is
not available, senders would be required to pay air rates, and
possibly air rates keyed to the characteristics of the Alaskan air
system. According to rate case figures, this would provide
additional revenues of about $70 million, but one would expect
associated adjustments that went beyond this figure.
Fourth, there would be post office closings. It is not easy to
predict which post offices would be closed. Using conservative
guidelines, an analysis done in the late 1970s concluded that about
12,000 offices should be closed.15 Services for people using these
offices would be provided in a less expensive way, using contract
stations in some cases. Since a number of offices have been closed
in the last 20 years, this estimate of 12,000 may not be current.
But if $30,000 per year were saved for 12,000 offices, another
one-third of a billion dollars would become available.
Fifth, there might be changes in the role the Postal Service
plays in policing the fraudulent use of the mails. In a competitive
environment, it might not be left with police powers and the right
to select those activities in the crime area that would give it a
competitive advantage. One alternative would be to turn this
function over to the Department of Justice.
Finally, there are some operational changes that would probably
be made. 1) The Postal Service would undoubtedly begin
14 These amounts were calculated conservatively and would vary
by rate case.
handling unaddressed mail on city routes,16 even as it does
already on rural routes.17 2) The Postal Service might stop (or
substantially alter) its detached address label program for
advertising mail. For mailers, the use of detached labels would be
a poor alternative to using unaddressed mail; for the Postal
Service, the use of detached labels is not well aligned with
current and future automation plans, and it may aggravate the
alignment of rates and costs. 3) The Postal Service would probably
make changes in the way postage is sold. Currently it adheres to a
policy that postage will be sold at face value, regardless of the
costs associated with its sale. A first step might be discounts for
the use of meter and permit indicia, which cost much less than
stamps, but other changes would follow. (Haldi 1999)


4. BASIC PRODUCTS OFFERED
Except for the creation of worksharing discounts and Express
Mail, the basic product line of the Postal Service was inherited
from Congress at the time of Postal reorganization in 1970.18 It is
not
15 At the end of FY 1998, there were 27,952 post offices. Each
post office has a postmaster. This count does not include stations,
branches, or contract stations. Annual Report of the Postmaster
General, 1998. 16 Unaddressed mail would go to all stops on a
carrier's route. Presently, addresses are required on such pieces.
This is essentially a make-work scheme: the mailers do the extra
work of putting the address on each piece and the Postal Service
does the extra work of arranging these pieces in delivery order.
Note that the postal services in many other countries carry
unaddressed mail. 17 An alternative to unaddressed mail would be to
auction off the right to be a third bundle on specific days in
specific post offices. A related change would be to set box rents
at what the traffic will bear. 18 The Express Mail subclass and
ECOM were created since 1970. Congress changed the qualifications
for In-county rates in 1986. The following subclasses have been
eliminated: ECOM, transient, controlled circulation, special
delivery, and single-piece third. Limited circulation was
eliminated, but it was not a subclass.
known what products would evolve under competition. To stimulate
discussion, five perspectives are offered below.

4.1. Speed of Service
Two important characteristics of mail are: 1) it does not cost
more to process some batches of mail before others, and 2) the
volume of mail fluctuates. To accommodate these fluctuations and
use resources evenly, it would seem reasonable to offer two tiers
of service: rapid and deferred, with air transportation being used
for the rapid product. Other distinctions are possible, such as
bulk and nonbulk, but the speed distinction would seem to
dominate.
The Postal Service has two basic subclasses for letters and
flats: First Class (originally rapid, non-bulk, and sealed against
inspection) and Standard A (originally deferrable, bulk, and not
sealed against inspection). Over time these distinctions have
deteriorated. First, due in part to worksharing programs, there are
now bulk categories in First Class. Second, a substantial portion
of Standard A is entered into the Postal Service near its
destination, in which case the opportunity to defer is limited.
Third, mailers and recipients are demanding on-time delivery of
Standard A, and the Postal Service is accommodating these
interests. One could argue that many mailers are getting
First-Class service at Standard-A rates. Fourth, many mailers of
First Class are not concerned about inspection. Fifth, the rate
structures of First Class and Standard A are dissimilar in rather
extreme ways, detracting attention from any focus on service.
Nonetheless, the rationality of service tiers remains. If the
MBMFC rule was removed and all mailers could choose between 11
First Class and Standard A, and if the fundamental distinction
between the two was service, one would expect a moderate rate
difference based on a real service difference. Also, one would
expect increased similarity in their rate structures. But the
assumption that change would center around these two subclass may
not be a good one. More pervasive changes would seem likely, but it
is not clear what they would be.


4.2. Tolerance for the Irregular
Throughout its history, the Postal Service has backed away from
constraints on the dimensions and characteristics of pieces that
can be mailed. The view has been that its mission is to serve and
that whatever is mailed will be delivered. In many cases, and often
for the same rate, a piece can be handwritten or typed, awkward or
standard in shape, flimsy or stiff.19 This posture has resulted in
the engineers being told to design equipment and mail handling
systems that will handle a frightening range of mail
characteristics. This has presented design difficulties and has
resulted in costly equipment. It has also led to operating
difficulties and to high processing costs.
Evidence of tolerance follows: 1) It was not until 1979 that a
non-standard surcharge was put on First-Class Mail, and even now it
applies only to the first ounce. 2) Except for some recent
automation categories, there is no rate distinction in First Class
among letters, flats, and parcels. Therefore, a letter weighing
more than one ounce
19 In FY 1998, the Postal Service processed 15 billion
handwritten addresses. Annual Report of the Postmaster General,
1998. The report says: "Our clerks or our new technology read your
handwriting, no matter how 'creative' it might be." p. 54.
pays the same rate as a flat or a parcel of the same weight. 3)
There is no rate distinction in Priority between flats and parcels,
even though there could be differences in the equipment used to
process them. 4) Except for the barcode discount, Periodicals rates
are not based on shape or machinability. Some magazines, for
example, are too heavy to be processed on flat sorting machines and
newspapers would be expected to have costs different from those of
magazines. 5) Handwritten addresses and pieces without Zip Codes
are accepted without surcharge. 6) During high-speed, mechanized
processing, some flats with open edges become aerodynamic. Yet,
despite a large cost difference, there is no rate distinction
between these flats and those that can be processed effectively. 7)
Nonautomated First-Class and Standard-A mailers have the option of
requesting that their mail be processed manually, even though the
costs for such processing are substantially higher than mechanized
processing.20 It is doubtful that any of these tolerances would
exist in a competitive system.
Conceptually, one can visualize a streamlined, low-cost
processing system for well-defined letter-size pieces that are
machinereadable. Similar systems could exist for flats and for
parcels. Such systems might allow lower rates for qualifying mail,
while pieces that would not qualify might be rejected or required
to pay a surcharge based on costs. Prices that recognize costs send
signals to mailers concerning the work that needs to be done. They
prevent high-cost mailers from being cross subsidized by low-cost
mailers, and they
20 See response to interrogatory OCA/USPS-84 in Docket No.
R2000-1. 13
allow the efficiencies of a low-cost mailstream to be available
to all who can use them.
One can surmise that a competitive postal service would do a
better job of presenting technologically feasible, low-cost product
options to mailers and either rejecting non-conforming pieces or
levying surcharges. Certainly a competitor would go after such
lowcost pieces first, as has Roadway Package Service in the parcel
area.


4.3. Demand
One of the hallmarks of competitive pricing is that higher
prices are charged to higher-demand customers. This practice
becomes even more pronounced outside of a breakeven requirement,
when additions to net revenue can be kept.
Under current conventions the Postal Service sets prices for
whole subclasses and cannot select specific customers for
surcharges or discounts. And for these subclasses, there are no
cases where a lower price will lead to an increase in net revenue.
However, if there are categories of mail that are attractive to
competitors, these categories should be viewed as extremely elastic
and the Postal Service would be expected to move its rates toward a
lower markup over costs. In other words, competition would force a
response from the Postal Service.21 Similarly, higher rates would
be expected for less elastic categories.
21 An extreme, but possibly realistic, situation should not be
overlooked. Suppose a potential competitor needed a critical mass
in order to begin operations. If one mailer were large enough to
provide that mass, or nearly provide it, that mailer, by
threatening to leave the Postal Service, might be able to negotiate
extremely low rates.
Dealing with this kind of situation is different from anything
being done today. Basically, the Postal Service would be expected
to assess competition and mailers' willingness to pay, and then to
segment its markets as much as possible. Indeed, one would expect a
degree of creativity from the Postal Service in finding ways to
acknowledge demand.


4.4. Content
The subclasses of mail that exist today are based in
considerable degree on content. In short, there is a subclass for
library materials, one for books, one for bound printed matter, and
several for periodicals. Further, the periodicals subclasses have
strict rules on enclosures, have regulations that depend on whether
the publication is bound or unbound, and most have rates that
depend on whether the material inside is advertising or
editorial.22 Also, there are cases where merchandise is treated
different from non-merchandise and where, under the MBMFC rule
discussed above, some kinds of content may use one subclass and not
others.
In cases where the willingness to pay of the sender is related
to content, it might be possible to argue that content would
continue to be recognized in rates. However, it is quite uncommon
for competitive carriers to differentiate based on content.
Instead, one would expect the emphasis on content to either
decrease significantly or disappear. If content did continue as a
rate-setting factor, it would probably take a different form from
what now exists.
22 In postal parlance, editorial is defined as material that is
not advertising. 15


4.5. Service Measurement
Under the assumption that the level of service is important,
knowledge about the level achieved is important. This has been a
difficult issue for the Postal Service. In recent years an external
measurement system for First-Class Mail has been developed and one
now exists for Priority, but actual service levels for most other
subclasses have been a great unknown. To fill this void, many
mailers measure the service their own mail receives. The Postal
Service usually responds to these measurements by saying that they
are not statistically valid or that they are not representative.
Nevertheless, it is well known that actual service levels are often
quite far from the published standards.
In a Postal Service poised to meet competition, considerably
more effort would be directed toward meeting published standards
and toward measuring the service achieved. Mailers would demand
such performance and such knowledge. Competitors would jump at the
chance to meet unmet mailer needs. A step beyond this issue is the
question of tracking and tracing. The Postal Service is behind its
competitors at this point; under competition, catch-up would be
expected to occur at a faster pace.



5. WORKSHARING AND CONTRACTING
One way to compete is to bring the strengths of the private
sector in-house. This can be done through worksharing discounts or
contracts and is especially effective when mailers can do the work
in a different way than the Postal Service. (Mitchell 1999) The
amount of work that can be turned over in this way is quite
large.
16
Consider the following example. Suppose mailers can sort
addresses on a computer and then print them in ZIP Code order.
Suppose further that they can do this for 1.5 cents per piece and
that this saves the Postal Service 4 cents per piece. In the areas
where worksharing discounts are offered now, the tendency has been
to move toward a discount of 4 cents. This lowers the net mailing
cost for the mailers involved and makes them less likely to go to
competitors. However, if the mailers were not on the verge of
stopping the worksharing activity or of going to competitors, the
Postal Service would maximize its financial position by giving a
discount closer to the figure of 1.5 cents. So, with freedom to
compete, there could be important changes in the way worksharing
discounts are set. Of course, prior to such changes, information
and analysis would be needed.
The Postal Service has extensive worksharing discounts. There
are, however, some limitations. First, no discounts are based on
any cost savings associated with the avoidance of collection
activities. Second, discounts for transportation have been limited
to Standard A, Priority over 5 pounds, and parts of Standard B.
There are no dropship discounts in Express Mail, none in First
Class, limited ones in Periodicals, and none in Special Standard or
Library Rate. Furthermore, even the dropship discounts in Standard
A are limited. For example, mail traveling 2,000 miles to get to a
destination facility gets the same dropship discount as similar
mail traveling 200 miles. Similarly, 3 truckloads of mail weighing
3 ounces per piece get the same dropship discount as 1 truckload of
mail weighing 1 ounce per piece. Clearly the Postal Service could
do more to transfer some of these operations to the private sector
through worksharing discounts.
Another way to shift work to the private sector is through
contracts with suppliers. This also has been done. For example,
contractors who submit the lowest bids do nearly all of the
long-haul trucking. Similarly, air transportation is provided under
contract, and a sorting hub for Express Mail is operated under
contract. A number of contract stations also exist for retail
services. There may, however, be limits to how much contracting can
be done effectively, partly because of the time and cost associated
with utilizing, placing, and monitoring contracts.
Consider the contract the Postal Service now has with Emery
Worldwide to process and transport Priority Mail. The idea was for
the low bidder to operate a highly focused sorting and
transportation system designed to get Priority Mail delivered on
time. Suppose, however, with suitable reverence to Adam Smith, one
looks at this plan according to its degree of roundaboutness. Here
is what happens: 1) the Postal Service collects the pieces and
brings them to a central point. 2) The Postal Service goes through
a sorting process to separate those pieces that go to Emery. 3)
Emery picks up the pieces at the cutoff time and transports them to
its own facility. 4) The pieces are unloaded and fed into sorting
machines. 5) After sorting, the pieces are transported to an air
facility and then sent by air to a destination, possibly using
lower-capacity equipment than the Postal Service might use. 6) The
pieces are loaded on a truck and transported to a Postal Service
facility. 7) The Postal Service integrates the pieces back into its
own system and takes them to the facility out of which the carriers
operate. This sounds like a lot of steps. Taking a degree of
writer's license, the alternative is to leave them in the postal
system, sort them first, transport them immediately, and deliver
them.
The jury is still out on the effectiveness of the Emery
contract. There are indications, however, that Emery is losing
money, that the Postal Service is spending more than if it had done
the work itself, and that there has not been a significant
improvement in delivery performance. It appears that the
roundaboutness and the associated extra steps may be taking a toll.
Whether this is an effective avenue to lower costs and improve
performance remains to be seen.
Note that the possibility of contracting out is not limited to
operations prior to delivery. If there are economies of scale in
delivery, and certainly if mail recipients do not want multiple
carriers accessing their mail boxes, it would be possible to define
routes, along with their expected workload, and auction them off to
the lowest bidder. This is already done on a few "star routes" at
about one-half the cost of rural carriers, and it is reportedly
being done by competitors of the Postal Services in the parcel
area. (O'Reilly)


6. COST RECOGNITION IN RATE DESIGN
Rates for the Postal Service are set following extensive
hearings before the Postal Rate Commission. Voluminous testimony is
provided, as are the results of numerous cost studies. In fact, the
volume of cost data amounts to tens of thousands of pages. Based on
the data and the testimony submitted, as well as on evidence
19
submitted by dozens of intervenors, rates are set in a very
detailed way. It is not uncommon for extensive testimony to focus
on discount differences of one or two tenths of a cent per
piece.
Despite all of this attention, there are weaknesses in what is
know about costs. For example: 1) Little is known about the
relative costs of flats and parcels in Priority and Express Mail.
2) Not enough is known about the effects of weight on costs in
First Class and Standard A, despite extensive related testimony23.
3) Knowledge is limited on the relation between weight and
non-transportation costs in nearly all subclasses. 4) Not enough is
known about how nontransportation costs vary with distance. 5)
Based on studies that have been questioned extensively, the rates
for Standard-A mail do not vary with weight up to about 3.3 ounces.
This means, for example, that for a large mailing going 3,000
miles, the same postage would be charged for ¾-ounce pieces
requiring one tractor trailer as would be charged for 3-ounce
pieces requiring four tractor trailers. 6) The extent of lower
costs for higher-volume mailers is unknown.
If the Postal Service faced competition in all areas, some of
these weaknesses might be associated with cream that could be
skimmed. A response by the Postal Service would be expected.
Improved cost studies would result. This is not meant to suggest
that costs have not been studied extensively. A great deal of money
is being spent on cost studies, but when the budget for these
studies is
23 Competitors understand clearly that 15-ounce pieces of
saturation mail can be carried privately for less than Standard-A
rates, while 4-ounce pieces cannot.
compared to a revenue that is near $67 billion, the percentage
amount is probably minimal.
When it is suggested that the Postal Service should spend more
on cost studies, questions arise about private sector expenditures
in this area. There are at least three possibilities. One, other
firms spend more. Two, most other productive operations are easier
to study and understand, since few firms have 40,000 locations and
a large proportion of their workforce working outdoors. Three,
operating managers in the private sector, based on their extensive
experience, are allowed to prepare mental estimates of what costs
probably are. However it would work out, it seems clear that
competition would improve the alignment of rates and costs.


7. COSTS BY DESTINATION
In recent years a number of studies have analyzed the widely
held belief that rural routes are more expensive than city routes.
The findings confirm the expectation to some extent, but the split
is not clean. It turns out that the income of the recipients is
also important, with many low-income, low-volume city routes being
unprofitable. (Cohen 1993) One reason for being concerned about
this issue is the possibility that, were the Private Express
Statutes to be relaxed, competitors would take the profitable
routes and leave the incumbent administration with the unprofitable
routes.
In the same vein, mail for the highest-volume recipients is not
even delivered � the mailers pick it up. In fact, many of these
recipients have unique ZIP Codes and their own sorting bin on the
sorting machines. The question then becomes: would a
competitive
21
postal service establish rate tiers based on the destination of
the mail? We know, for example, that Roadway Package Service, at
least initially, did not solicit mail for residences and that UPS
charges extra for addresses designated as residential. Also, UPS
selects certain Zip Codes for an additional surcharge. At least for
bulk mailers, and in a computerized world, such rate differences
are easy to manage.
The Postal Service could, for example, place a Roman numeral in
front of each ZIP Code, yielding a code like I-20878-2619. The
numeral "I" could indicate a low-cost recipient who picks up mail
in bulk. The numeral "II" could indicate locations of average
income and stop density that are relatively economical to deliver.
The numeral "III" could be for high-cost areas.
Rates based on numerals could result, even though there would be
transaction costs. Such a system, however, might not be the most
desirable, one downside being that the smallest single-piece
mailers could default to a rate that is high enough to cover all
destinations. Also, to the extent that mailers send broadly to all
destinations, a system of this kind would not change postage bills,
it would just increase some rates and decrease others.
Before leaving the question of higher-cost delivery areas, it
should be noted that a mitigating option might be to reduce the
number of deliveries per week. (Cohen 1999) Although many observers
would view this as an extreme step it could reduce costs and allow
increased efficiencies. For example, mail could be sorted one day
and delivered the next, resulting in a less demanding schedule.
Also, the effect on the recipient might not be as large as commonly
assumed-in effect, one-half of the mail would be delayed one
day.
A related service issue is whether there are unreasonable
transportation runs that should be eliminated. That is, a review
could be done to see how many transportation runs are scheduled
solely to meet a deadline or a service standard, but which involve
very little mail. These runs could cost far more than the value of
the small improvement in service.


8. COSTS BY CUSTOMER
Although the details are kept private, it is well known that
many private-sector firms set rates via contracts with selected
customers. Sometimes these are based on agreements that the
customer will prepare the mail in certain ways; at other times they
are based on a threat that the mailer will find another carrier. As
an economic matter, it is clear that a postal service is better off
having a customer at a near-cost price than not having the customer
at all.
Were the Postal Service to be allowed to set rates under
contracts, or to bid for business, it would need costs by customer.
At the present time, costs by customer are not available and the
Service's costing systems are not set up to develop such costs. In
short, this is a whole new costing area that would need to be
undertaken.24
If contract rates with selected customers were allowed, several
questions would need to be addressed. First, would the terms of
each agreement be made public? The answer is probably yes. Second,
would all customers satisfying the requirements of the contract be
allowed to use the same rates? The answer here is probably yes as
well, even though private-sector firms would say no on both points.
Third, how rigorous and defensible would customer-specific costs
have to be in order to qualify as an acceptable base for a
contract, and would the costing receive review by any outside
party? One is tempted to argue that there should be a defensible
study, but the problem is obvious- some private firms undoubtedly
base contracts on the judgment of the managers involved.
Furthermore, the result can be based on negotiating skills.
The prospect of allowing contract prices in a government postal
service, based on judgment and negotiating skills, raises another
question. Specifically, private firms have stockholders. If
discounts are too large, the stockholders pay, along with managers
who may lose their jobs. Whether a government postal service can
engage in these kinds of negotiations deserves serious study.
9. INVERSE PRICE CAPS
If the Postal Service should have a greater degree of pricing
freedom and be able to engage in negotiations with selected
mailers, one way to provide such freedom, even without further
changes, would be to allow the Postal Service to operate under
inverse price caps.
Within the existing rate-setting framework, the idea of an
inverse price cap is to allow the Commission to recommend an
average price level (or index) that is viewed as a floor. Then the
Postal Service could make wide-ranging adjustments of the rates in
the subclass, including contract rates for some of the subclass
users, as long as the average rate for the subclass does not go
below the inverse cap. If the Commission believed that a low markup
for the subclasses was in order, then the low markup could be
recommended. Full review would be provided and all affected parties
would have an opportunity to be heard. This is an alternative to
some recent legislative suggestions that the markup on the
competitive subclasses as a group must be at least as large as the
markup on all other subclasses.
The inverse price cap is a relatively simple notion that would
require no more than a minor adjustment to the law, if one is
needed at all. It deserves further study. Within the framework of
this paper, it could play a role as well. Specifically, suppose
unconstrained competition were allowed but the Postal Service
turned out to have sufficient market power in some product areas to
allow other products to be priced at or near the level of
incremental cost. If this was viewed as unfair competition, an
independent regulatory commission could establish and monitor
certain inverse price caps. This would provide substantial freedom
to compete, but within a constrained framework.
10. HAVING A GOVERNMENT PROVIDER
One of the questions of this paper is whether the Postal Service
could become a sustainable monopoly if all protection were removed.
There are both disadvantages and advantages to having a single
government provider under these conditions. Among the disadvantages
are that the degree of innovation and product differentiation might
continue to be limited. On the advantages side, several
considerations are relevant. The Postal Service has established the
zones and the ZIP Codes that are now used by all carriers. It also
manages a forwarding system and a change-of-address system,25 both
of which honor policies on privacy. In addition, it carries mail
that is sealed against inspection and acts as a watchdog over
fraudulent use of the mails.
If desired, having one carrier would allow the maintenance of
the mailbox rule (with, as discussed above, a reduction in
competitive pressure), which in turn would be helpful in protecting
the mail. Also, residents could leave originating mail in their
boxes and know who would pick it up and that it would be handled
appropriately. Having one carrier would also reduce vehicle traffic
in neighborhoods and allow familiarity with recipients. Such a
carrier can deal better with irregularities and can watch over the
delivery area.
25 If competition was allowed and competitors arose, it might be
that a change-of-address system could be operated by a separate
entity and made available to all competitors. This is reportedly
being done in Sweden.


11. CONCLUSION
It is a common belief that the Private Express Statutes and the
mailbox rule serve as protection to allow universal service at
uniform rates. When viewed in terms of changes the Postal Service
would likely make if it wished to make itself into a sustainable
monopoly, it becomes clear that these restrictions protect much
more than just universal service. They also protect the preferred
subclasses of mail, low rates for Periodicals, classifications that
are not market based, rates that do not follow costs, and a range
of other practices discussed in this paper. If these are not
inherently desirable, or if a decision were made to give them less
weight, changes could be made to eliminate them now, even without
relaxing the Statutes. If some of them are desirable but not
others, limited changes could be made, one possibility being
inverse price caps.
There are, however, benefits to having a government postal
service, in addition to the uniform rates and special rate
structures. Specifically, the Postal Service establishes the zones
and the ZIP Codes, guards privacy, forwards mail, and protects
against crime. Also, having one postal system reduces traffic and
pollution. Further, if the mailbox rule were maintained, only one
person will pick up an outgoing letter placed in the mailbox.
Further analysis is needed of the benefits of the current system
relative to the benefits of an alternative system, and of whether
some of the benefits of an alternative system can be obtained by
making adjustments to the current system.


References
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Postal Services Under Competitive Entry" in Commercialization of
Postal and Delivery Services: National and International
Perspectives, edited by Michael A. Crew and Paul R. Kleindorfer,
Boston: Kluwer Academic Publishers.
Cohen, Robert H., William W. Ferguson, John D. Waller, and
Spyros S. Xenakis. 1999, "Does the USPS Need a Monopoly to Carry
Out its Universal Service Obligation?" presented at the Seventh
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23-26.
Cohen, Robert H., William W. Ferguson, and Spyros S. Xenakis,
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Haldi, John and John T. Schmidt, 1999, "Transaction Costs of
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Mitchell, Robert W. 1999, "Postal Worksharing: Welfare,
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