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:

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.

What do you think – should the Postal Service lower prices on some products to reflect current excess capacity? Or would lowering prices only lead to further revenue declines?

Comments (3)

  • anon

    Really... uping the price again??? How about if we start by getting rid if the postal workers that are not working for half of their day!!! Example: my house us second to last on the route and runs between 4:30 n 5:00 pm on the normal, as the post office is less than 5 minutes from my house. My mail carrier actually comes between 12:30 and 2:00 pm on the norm and has sat in front of my or my neighbors or the business next doors parking lot for an hour or so or just left and came back to scan at the designated time 5 out if 6 days...I am disabled and watch this daily!!! This angers me when I live in a fixed income. I have actually written a complete letter and took it out knocked on the vehicle and interrupted the carriers phone conversation to have it mailed!!! This misuse of money is sickening... something besides postage increase needs done to pay for this!!!

    Jan 28, 2013
  • anon

    Cost cutting? Please! Two areas to consider the mail delivery vehicle, and the house to house delivery. Mail delivery vehicle: Modify the current fleet to utilize electric propulsion. House to house delivery: Discontinue. The exception being the elderly and disabled. Both venues stimulate the USPS and the economy.

    Jan 27, 2013
  • anon

    Yes I think the Postal Service should lower prices for short term runs. Also I think they should have a larger selection of boxes other than flat rate boxes. Thank you, Marvin

    Jan 09, 2013

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