Shapiro: Rate Request Reveals Dependent Status of Competitive Products

Economist Robert Shapiro holds that the U.S. Postal Service’s recent filing for an increase in competitive product rates only shines a light on how artificially low its open marketplace prices are. “The notion that they’d have to raise the rates to meet a 5.5-percent requirement for fixed costs just illustrates the extent to which they have been subsidizing these products,” Shapiro told Direct Marketing News. “They’ve driven the prices down so much they can’t even raise the revenue to meet a five-percent obligation.”

The ex-Under Secretary of Commerce, and now CEO of economic advisory firm Sonecon, contended that the mandated contribution to institutional costs such as trucks and plants is itself an unrealistic, contrived number. “The fact is,” he said, “that competitive products account for about 28 percent of all revenues and attributable costs. Five-and-a-half percent doesn’t even pay that lip service.”

Were any new postal reform to raise the percentage of fixed-cost contribution to anywhere near that level, the result for USPS’s package and shipping businesses would likely be catastrophic. A new Sonecon report on postal cross-subsidies sponsored by United Parcel Service found that a unit increase in the price of competitive products would reduce demand 6.7 times as much as the same increase would for market dominant postal products like Standard Mail.

Shapiro favors spinning off the competitive products business into a private company that would be forced to compete on a level playing field with major shippers like UPS and FedEx, while letting market dominant products remain under the stewardship of the Postal Service. “The legitimate government operation is the monopoly operation. It services the monopoly proposition of universal service,” Shapiro said.

Shapiro expressed certainty that further study of the privatization option would reveal its advantages to lawmakers and, especially, to bulk mailers. “If they didn’t have to subsidize the competitive operations, [market dominant] rates could be even lower,” Shapiro said.

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