Study: USPS's Package and Shipping Prices Are Artificially Low

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High rates on market dominant products prop competitive businesses and create an unfair marketplace, says a UPS-sponsored report.

Bulk mailers who complain that the prices they pay for Standard and First Class mail subsidize USPS competitive products like shipping and packages got some evidentiary backing today from Robert Shapiro, former Under Secretary of Commerce and economic advisor to President Clinton.

“This is the best example we have of cross-subsidization.The only reason the Postal Service can compete in these areas is with their very inefficient and essentially unfair way to conduct their business,” charged Shapiro.

USPS takes in between $1.69 and $2.21 for every dollar it spends on its market dominant products, but only $1.39 for every dollar it spends on competitive products, said Shapiro in releasing the results of a study sponsored by the United Parcel Service entitled, “How the U.S. Postal Service Uses Its Monopoly Revenues and Special Privileges to Subsidize Its Competitive Operations.”

“We found that a unit increase in the price of competitive products will reduce demand 6.7 times as much as a similar increase in the price of its monopoly products. The response to this phenomenon is to raise prices for the monopoly business and artificially keep prices down on the competitive side,” said Shapiro (left), now chairman of Sonecon, the economic advisory firm that conducted the study.

When all attributable and estimated institutional costs are brought to bear on financials, the Postal Service's Priority Mail business posts a negative net income of nearly $1.9 billion and Ground Shipping a loss of almost $1 billion. Both businesses, Sonecon calculates, are almost 30% subsidized by market dominant revenues.

The Postal Service last week filed for rate increases on competitive products, including a 9.8% increase over three years for Priority Mail, to keep in line with its statutory mandate to contribute 5.5% of revenues to USPS instructional costs, such as real estate and delivery trucks. But the Sonecon report holds that 5.5% is far too low considering the rise in revenue contribution competitive products have seen since the Postal Accountability and Enhancement Act was passed in 2006.

“The Postal Regulatory Commission set the share at 5.5 percent nearly a decade ago. But competitive products now account for 24 percent of revenues and 28 percent of costs, so how can they only support 5.5 percent of the institutional costs?” wondered Shapiro.

Shapiro claimed the answer is a solution instituted by posts in other countries and suggested by the President's Commission on the Postal Service—separating private and public operations into two distinct organizations that would not share facilities, equipment, or workers. “Then you can subsidize as much as you want the competitive aspects of the operation,” Shapiro said. “Instead, we cap monopoly prices at the rate of inflation and have to cover costs plus a share of postal fixed costs—not a terrible second solution but, in practice, it hasn't worked at all. PRC has ignored the cap, most recently in December 2013 [when it approved the 4.3% exigent surcharge].”

Earlier this year, Sonecon released a study that fixed the value of the Postal Service monopoly at $18 billion a year, about four times greater than USPS's own assessment of its advantages. These take such form as exclusive access to residential and business mailboxes, sharing use of trucks and plants with market dominant products, and exemption from state and local property and fuel taxes.

Shapiro said the Sonecon study is based on aggregate analysis, since USPS would not open its books for review. “It would be better for consumers and, ultimately, the Postal Service if we could get more transparency,” he maintained. “This produces a less efficient marketplace. High subsidy rates exert downward pressure on the prices of those products and then we pay too much for the Postal Service's monopoly products.”

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