- Using short-run costs can result in prices that may generate additional revenue in the short term but will still not allow the Postal Service to cover its institutional costs.
- Prices based on short-run costs would be more volatile.
- Customers may be unsure as to whether prices are permanent or temporary.
- Accurate measurement is difficult and would require significant effort from experts in postal operations.
- The Postal Service may lose the incentive to shed the excess capacity.
on Jan 9th, 2013
in Finances: Cost & Revenue
| 3 comments
Some have argued that the U.S. Postal Service should be allowed to raise prices in order to increase revenue and ensure that the sales of their products cover their costs. Others have argued that the current costing system may overstate the cost of some products, as it assumes the Postal Service is able to adjust its capacity, such as quickly closing a facility or eliminating a tour, to match the decline in mail volume. So, the second argument goes, if the Postal Service is unable to adjust its capacity, it should temporarily lower the prices of certain products, in order to encourage volume, as it did in the past with its “summer sales.” The latter argument was briefly discussed in the OIG’s recently released paper “A Primer on Postal Costing Issues.” As a follow-up to that paper, we asked Professor Michael D. Bradley of George Washington University, an expert in postal economics, to co-author a paper on the use of short-run costing and pricing. Essentially, short-run costing varies from the current costing system in that it does not assume that the Postal Service can reduce its capacity as fast as volume falls. Using short-run costs to develop prices would allow the Postal Service to temporarily lower prices, at least on some products, to encourage volume that would make use of the excess capacity while the Postal Service creates a plan to reduce the excess capacity. However, the paper warns that short-run costs should only be used to set prices if they can be measured accurately and updated regularly and the Postal Service can be sure that a lower price will lead to a large enough increase in volume, otherwise they will simply lose revenue. Other issues that need to be considered when using short-run costs to set prices include:
on Jan 7th, 2013
| 5 comments
U.S. Postal Service employees are covered by the Federal Employees’ Compensation Act (FECA), which provides workers’ compensation benefits to civilian federal employees who sustain work-related injuries or an occupational disease. The U.S. Department of Labor Office of Workers Compensation Programs (OWCP) administers workers’ compensation and provides direct compensation to providers, claimants, and beneficiaries. The Postal Service later reimburses OWCP in what is known as “charge-back billings.” The Postal Service is the largest FECA participant in the federal government. It paid $1.2 billion in workers’ compensation claims and $67 million in administrative fees in charge-back year 2011. In addition, its estimated total liability for future workers’ compensation costs is about $17.5 billion. The Postmaster General noted in testimony last year that when the Postal Service revalues its liability to reflect current interest rates, it creates significant non-cash fluctuations in its bottom line. For this reason and others, the Postal Service has pushed for comprehensive FECA reform legislation. Providing gainful employment within medically defined work restrictions is in the best interest of both employees and the Postal Service. The Postal Service uses its limited duty program to assign available work for those employees who are temporarily unable to perform their regular functions. Limited duty employees retain the discipline of going to work every day and recuperation may also be accelerated if they are as active as possible. Early return to the regular job is the ultimate objective of the limited duty program. However, with diminishing mail volumes and limited resources for proactive case management, the Postal Service faces significant challenges in providing adequate work. The Health and Resource Management (HRM) staff and other officials play an important role in administering the injury compensation program and reducing related costs by returning injured employees to work as soon as possible and, in part, pursuing third-party liability. The Office of Inspector General (OIG) intends to assess whether the Postal Service’s HRM staff, supervisors, and other officials have all the necessary resources to successfully return employees back to work. And if not, what tools do they need to facilitate the return to work process. What practices are working or should be changed to more effectively administer the Postal Service’s injury compensation program? Share your comments in our blog section and follow the link to take one of the three surveys on this topic, depending on your employment position.
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