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PRC Grants Mailers’ Request for Review of Rate Elasticity

The Postal Regulatory Commission has approved a request from a coalition of mailers to review the econometric elasticity demand model used by the U.S. Postal Service as background in researching rate changes, such as the 4.3% exigent increase put in effect earlier this year. The PRC has scheduled a technical conference to examine the issue on August 13 at PRC headquarters in Washington.

Among economists, a good or service is said to be elastic when changes in price have a significant effect on demand. Conversely, products and services whose demand holds steady in the face of price increases are said to be inelastic. In asking for the exigent increase, the Postal Service leaned heavily on a May 13 analysis issued by the Postal Inspector General’s office (OIG) affirming that postal products are firmly inelastic. Price increases increase postal revenues, and price decreases decrease revenues, said the report, because usage levels remain fairly constant. Excepting Standard Enhanced Carrier Route mail, the OIG report said postal products have grown more price inelastic over time.

In its motion for a hearing on the matter, the mailers’ group held that the econometric volume demand model the Postal Service uses “materially understates” the true price elasticities for major postal products. USPS counter-petitioned the PRC to table the issue, holding that “a proceeding would serve no useful purpose and that the interests of the Commission and the Postal Service would be better served by focusing their scarce resources elsewhere.”

The PRC sided with mailers based on a study by PRC economists that presents a model for deriving different demand elasticities for separate classes of mail. In its decision, the Commission said that such analyses broken down by industry class or individual mailer could prove a boon to the Postal Service’s campaign to sign Negotiated Service Agreements with users of market dominant products.

The coalition that petitioned the PRC was made up of the National Postal Policy Council, the Association for Mail Electronic Enhancement, the Association of Marketing Service Providers, GrayHair Software, the Greeting Card Association, the International Digital Enterprise Alliance, the Major Mailers Association, and the National Association of Presort Mailers.

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