Playing the Monopoly Card

What can we learn from the most recent study, sponsored by the Brookings Institution? Is the information new, reliable and actionable?

It all Depends on the Assumptions

If you accept the assumptions of the study, the Postal Service may benefit from $18 billion in annual subsidies. But the many of the assumptions are questionable, and some important concerns are not addressed completely or are left out entirely.

What is the Point?

According to the study, the USPS is demonstrably and dramatically less efficient and productive than private companies carrying out comparable operations (p.13). The author states that this helps explain the USPS’s periodic need to raise rates.

So what explains the annual price increases of the highly efficient competing package delivery firms?

B1The Postal Service struggles to fit a legislative and regulatory model designed for the pre-digital age. It is not permitted the same operational freedoms to reduce costs as a business. The Brookings study still focuses primarily on postal services as a public good – a consumer utility. But the “people” of the U.S. don’t pay for the Postal Service in any significant way.

Make no mistake about it – the real value of the Postal Service today is that it helps businesses succeed by connecting with their customers (mostly households). That value is described in response rates, return on investment, profits, customer satisfaction and similar business oriented measures compared to alternative channels available to businesses and households.

Subsidies are Business as Usual in U.S. Business

B2In the real world of modern U.S. commerce, many big firms and even entire industries receive significant direct and indirect benefits from the government. Armies of accountants, legions of lawyers and lobbyists, billions in public relations and political donations ensure that the market is not “pure”. The Postal Service is not the only firm receiving benefits from government to achieve public purposes.

It is interesting that this study comes as the Postal Service is actually having some success in the package market against the package delivery duopoly of FedEx and UPS. We can assume that the Postal Service’s direct competitors, with their well-funded lobbying organizations, also receive special treatment, although it may be different. The real issue is if customers have choices in the market that compel providers to be responsive and efficient.

The Illusion of Monopoly Protection for the Postal Service in the Digital Age

The Brookings study recognizes that mail volumes are adversely affected by the substitution of online bill payments and other forms of digital communication. The study includes the reasonable assumption that letter mail volume will continue to decline.

Why then, will entrepreneurs be attracted to invest in this dying market simply by eliminating the postal monopoly?  This is a key assumption in many postal monopoly studies, but it is based on the idea that the Postal Service is so inefficient and costly that it can easily be undercut while providing superior service (such as continued delivery to the door while the Postal Service withdraws to curbside or cluster boxes). It also assumes that entrepreneurs can be allowed to fail in providing this service, and that such services will be provided everywhere (some sort of universal service requirement). These are illusions.

Evaluating the Real Costs of Postal Operations under Public Service Constraints

The Postal Service has become more efficient by investing in large scale automation and related information technology, at least for letter mail processing. It is the most productive postal system in the world (pieces per employee) at the lowest postage rates.  It has “privatized” its long-haul transportation function, developed “work-sharing” discounts that have created an innovative industry of mail service providers, and entered into contracts with competitors to provide “last mile” delivery services where it is mutually beneficial. The national postal infrastructure has become a platform for the growth of a large industry.

B3When the study compared productivity rates across various industries, it did not consider that the Postal Service has been specifically restricted from engaging in many of the infrastructure and service reductions that are normal in other industries – or that have been implanted in other countries.

The estimation and allocation of costs and benefits of postal services are complicated. Postal cost allocations – including those between the allegedly “competitive” and “market dominant” categories – are complex formulas that have been created through decades of hard-fought and often very nearly impenetrable evidentiary hearings before the Postal Regulatory Commission and the courts.

Postal unions have long opposed these approaches, and have claimed that much of the Postal Service is already “privatized” and that this hurts not only postal employees but also the public through reductions in accessibility and service. FedEx and UPS simply want the USPS to be forced to be less competitive in pricing its package services.

The mailing industry and their customers are concerned about the costs burdens of universal and public services. They serve no particular business purpose for them – commercial mailers are not concerned with public access to the mail system through small post offices and can adjust to necessary negotiated reductions in operating networks, distribution requirements and changes in service standards or even the number of days of delivery. Businesses pay the costs not only of public service that does not necessarily help their bottom line, but also pay for “purely governmental” functions such as the Postal Regulatory Commission, the Office of the Inspector General, and the Postal Inspection Service (consider this an implicit tax on the mailing industry and their business customers).

Addressing Real Problems: A Call to Action

The Brookings study highlight issues that have yet to be resolved, but it does not point the way towards any practical solutions. The postal monopolies can be reduced or even eliminated, but by itself this action will not create a more efficient and effective postal system. The governance problem – preserving the trappings of a public service while continuing to shift the cost burden to commercial customer who have alternatives – remains to be resolved.

By Kent Smith

Kent Smith is Research Director, Ursa Major Associates / Postal Vision 2020. His 38 year career in the Postal Service included Rate Classification Research, Market Research, and Strategic Planning. Ursa Major Associates / Postal Vision 2020 is dedicated to taking a broader, longer-term perspective on the future of the mailing industry ecosystem. The thoughts expressed in this “Point of View” are his own.

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3 Replies

  1. Liam Skye

    Whereas,
    SUBSIDY (from Thefreedictionary.com)
    n. pl. sub·si·dies
    1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
    2. Financial assistance given by one person or government to another.
    3. Money formerly granted to the British Crown by Parliament,

    And whereas,
    The government does not provide USPS with $18 billion in monetary assistance, despite that false claim made in the completely discredited study by Robert Shapiro, prostituting his Harvard education for crass lucre from the accounts of and at the behest of United Parcel Service. The evidence can be found in the freely available financial reports, published and certified on USPS.com,

    Therefore,
    USPS does not receive an $18 billion subsidy from the government and the false claim is thoroughly debunked yet again. Postalvision2020 should be ashamed for its gullibility in publishing such a nonsensical, and patently untrue, claim despite its immediate disclaimer. Here’s a lesson everyone learned within months of the invention of the World Wide Web a couple of decades ago: simply publishing something online does not make it true.

    1. Kent Smith

      Liam,

      I appreciate your passion on the subject. But please re-read the post a little more carefully. We said that the assumptions of the study were flawed and presented an incomplete picture. We wanted to point out that UPS and FedEx also get substantial benefits from government, as almost all large firms do. We pointed out some basic contradictions in the conclusions, and moved on to note several key issues that the Shapiro study ignores.

      Thanks for reading.

  2. Liam Skye

    Whereas,
    SUBSIDY (from Thefreedictionary.com)
    n. pl. sub·si·dies
    1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
    2. Financial assistance given by one person or government to another.
    3. Money formerly granted to the British Crown by Parliament,

    And whereas,
    The government does not provide USPS with $18 billion in monetary assistance, despite that false claim made in the completely discredited study by Robert Shapiro, prostituting his Harvard education for crass from the accounts of and at the behest of United Parcel Service. The evidence can be found in the freely available financial reports, published and certified on USPS.com,

    Therefore,
    USPS does not receive an $18 billion subsidy from the government and the false claim is thoroughly debunked yet again. Postalvision2020 should be ashamed for its gullibility in publishing such a nonsensical, and patently untrue, claim despite its immediate disclaimer. Here’s a lesson everyone learned within months of the invention of the World Wide Web a couple of decades ago: simply publishing something online does not make it true.

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