- 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 Jun 14th, 2010
in Pricing & Rates
| 11 comments
The Postal Service has more than 10,000 prices contained in a 1,800-page customer manual known as the Domestic Mail Manual (DMM). The DMM provides individual and commercial mailers with information about postal services and standards for both domestic and international mailings. The Price List, also known as Notice 123, contains domestic and international retail and commercial prices for all postal products and services. The list covers every price from mailing one First-Class Mail® letter to paying for a 100,000-piece mailing that has been presorted and transported closer to its final destination. If the mailer wants extra services such as Signature Confirmation, Collection on Delivery, or insurance, prices for these services are also provided. Does the Postal Service need more than 10,000 prices for its products and services? Can the Postal Service significantly reduce the number and complexity of prices?
Share your ideas on how improvements could be made to the Postal Service’s DMM and prices, and what the Postal Service can do to significantly reduce the number of prices. Or tell us why you feel the current DMM and pricing structure should remain unchanged. This topic is hosted by the OIG’s Office of Audit Capital Investments team.