Pricing “Competitive” Postal Products

Timothy Brennan

A chapter in The Changing Postal Environment, 2020, pp 81-94 from Springer

Abstract: Abstract The US Postal Service (USPS) provides “market-dominant” services on an exclusive basis, e.g., first class mail, and “competitive” services in markets with rivals, e.g., parcel delivery. Rivals have long complained that USPS underprices if not cross-subsidizes its competitive offerings. I ask what prices of the monopoly and competitive services maximize net economic welfare across the market-dominant and competitive service markets. With perfect competition, USPS should charge the market price and use the profits to finance reductions in market dominant service prices. If the regulated firm faces a fringe, Ramsey rules hold based on the elasticity facing that firm, recognizing fringe supply share and elasticity. If a rival offers a differentiated product, we find, following Prieger (1996), that the regulated firm’s price in that market should exceed the Ramsey price because the rival sells too little. This price will be the target if pricing in the differentiated competitive market is simultaneous rather than sequential. Application is complicated if a publicly-owned postal operator is not profit-maximizing.

Date: 2020
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DOI: 10.1007/978-3-030-34532-7_7

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