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As ITIF has long argued, good postal reform legislation is critical because the market environment presents the U.S. Postal Service (USPS) with both short- and long-term challenges. Congress is now poised to vote on postal reform legislation: House Committee on Oversight and Reform Chairwoman Carolyn Maloney (D-NY) and Ranking Member James Comer (R-KY) have moved the 2021 Postal Reform Act through the committee. And Senate Oversight Committee Chairman Gary Peters (D-MI) and ranking member Rob Portman (R-OH) have introduced a bipartisan companion bill in the Senate.
One long-running issue is the role of USPS in providing competitive package services. Private providers of package services, such as UPS, push for provisions that would make it harder for USPS to engage in package delivery. In addition, two economists recently published a study supported by an organization called The Family Business Coalition that argued for limiting special discounts that some large package shippers, especially Amazon, receive from USPS. While the study touts the benefits of restricting these discounts on small shippers, major private commercial shippers, like UPS, would also benefit.
Congress should ignore the authors’ entreaties for the simple reason that the 2006 Postal Accountability and Enhancement Act (PAEA) required the Postal Service not to cross-subsidize packages so it would be assured of competing fairly with companies like UPS and FedEx. And the Act charged the Postal Regulatory Commission with enforcing this requirement. The Act required the Postal Service to ensure that package deliveries covered all their attributable costs and an appropriate share of overhead.
Moreover, with regard to claims that USPS is unfairly underpricing packages, USPS, the PRC, and the courts have all said that they do not. In May 2018, the U.S. Court of Appeals for the District of Columbia ruled in favor of the PRC in a complaint brought by the United Parcel Service (UPS) that asserted USPS was unfairly competing in the parcel marketplace. The court ruled that because “the Commission’s exercise of its authority [was] ‘reasonable and reasonably explained,’ we deny UPS’s petitions for review.” Should the cost structure of the USPS change such that packages should support a higher share of overhead, the PRC is statutorily responsible and equipped to require such a change.
In fact, in a study sponsored by the Package Coalition, economist John Panzer et al. argued:
The Postal Service has earned substantial profits serving this growing package business. It is able to do so because of the economies of scope between its letter and package delivery services that allow it to realize cost efficiencies in delivering mail and packages together. The Postal Service passes through the benefits of those efficiencies in the form of lower prices to businesses and consumers who use the Postal Service’s nationwide delivery network.”
Indeed, the study argued that “The package business is the silver lining of the Internet cloud that looms over the Postal Service.” Likewise, a report by Charles River Associates’ economists Debra Aron and Justin Lenzo, supported by the Package Coalition, found that consumers and the Postal Service would be hurt by increases in package delivery prices.
A principal reason why USPS should be able to price packages in a way that neither subsidizes them nor treats them as a “cash cow” is that by delivering packages through its efficient last-mile network, it maximizes efficiency. As the Panzer study concluded:
A major reason for the success of the Postal Service’s package business is the fact that its package business uses the same last-mile delivery network used for its letter mail delivery business. Because of the substantial economies of scale in delivery, the Postal Service’s cost of package delivery is less than using a stand-alone delivery network. Similarly, the costs of the Postal Service’s letter delivery operations are less on a per-piece basis when provided along with packages than would be the case if letter service were provided using a stand-alone delivery network. Thus, economies of scale in its delivery network enables the Postal Service to enjoy economies of scope between its letter mail and package operations.
The Family Business Coalition study also claims that USPS subsidizes Amazon packages, “not to USPS’s advantage.” But why would the leadership of USPS, including the Postal Board of Governors, engage in practices that help a particular company but hurt USPS? The board’s mission is to ensure that USPS interests are advanced, and there is no evidence that they are not doing that.
Moreover, should any of the private package delivery companies believe that USPS is unfairly pricing packages, either in whole or to a particular customer, they have the right to file a complaint with the PRC for it to investigate, and the PRC is required by statute to investigate. There is no need for restrictive legislation on this matter.
In addition, the argument the study makes that discounts for large shippers, compared to small, are unfair because “small business… cannot avail themselves of such discounts” makes little sense. The principle of volume discounts reflecting lower costs has long been established in U.S. antitrust law. As the Federal Trade Commission notes, “Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller’s attempts to meet a competitor’s offering.”
Finally, the authors:
echo the economic logic behind the Robinson Patman Act’s prohibition on secondary-line price discrimination. We acknowledge that the Act, while still law, has received little enforcement interest from the regulatory agencies. Nonetheless, its statutory intent was to protect smaller, individual dealers (e.g., “mom-and-pop” stores) from larger merchants (chain stores), whose buying power enabled them to extract favorable deals from manufacturers, in the same manner that Amazon extracts advantageous shipping rates from USPS.
The Robinson-Patman Act of 1936 attempted to protect small businesses from cost-based pricing by their suppliers and outlawed various kinds of discounts that advantaged large chain stores. In fact, this law was drafted by H. B. Teegarden, the general counsel of the United States Wholesale Grocers, and backed by that lobby along with the National Association of Retail Druggists. Patman’s nationwide speaking tour the following year in 1937 was paid for in part by McKesson & Robbins, a drug wholesaler that was financing the anti-chain store campaign to gain the support of independent drug stores, all the while secretly assembling its own retail drug store chain.
Appealing to warm feelings toward “mom and pop” stores may be good politics, but it is bad economics. As my colleague Mike Lind and I have pointed out, government data clearly shows that larger firms pay their workers more, provide more benefits, are more productive, and provide a host of other benefits, on average, compared to small businesses. Moreover, volume-based pricing—businesses setting prices based on actual costs (and costs are usually less with high volumes) is neither unfair nor bad for the economy. Requiring USPS to charge the same price as shippers, regardless of volume, would be unfair and bad for the economy.