A Critical Examination of the USPS Study of Postal Price Elasticities
There are problems with the U.S. Postal Service's analysis of postal price elasticities. The study lumps all types of mail together and concludes that raising postal rates will result in a net increase in revenue. The study downplays the nearly 10 to one difference in price elasticity between First Class mail and Carrier Route mail.
The study defines price elasticity to mean that a cost increase will result in a short-term net increase in revenue because the revenue increase will be more than the lost mail volume.
No analysis is given to the long-term implications of rate increases or whether an increase in revenue is the sole criteria for judging the merits of a postal rate increase. The study also doesn't address the decrease in volume or the effect on profitability from a cost increase.
The study buries a startling conclusion in a footnote: That raising the cost for carrier route mail will result in a loss in net revenue. This means it would be irrational to raise the cost of carrier route mail. No work is done to consider which subparts of mail categories are actually elastic, as well as what should be done to price those categories of mail so volume doesn't decrease.
The study, Analysis of Postal Price Elasticities, shows that carrier route mail is the most elastic in terms of price sensitivity. Hidden in the analysis is a very important piece of information: "A case can be made for the proposition that Standard Enhanced Carrier Route (ECR) Mail has a price elasticity of one. A price elasticity equal to one means that raising ECR's price would leave gross revenue unchanged." In other words, if you raise the postage on carrier route mail, the drop off in volume would offset the postal rate increase and overall revenue would not increase!
Why is the price elasticity of Standard mail important? There's the threat that the USPS will ask for another exigent rate increase. The last exigent increase was overturned by the Postal Regulatory Commission and Appeals Court review process. The legal review of the statute held that an exigent increase required extraordinary circumstances and that the USPS needs to have studied the economics of a price increase and the impact on all classes of mail.
The legal ruling was that the USPS had failed to meet the statutory requirements of extraordinary circumstances and needed to do economic analysis of postal price increases. This study, Analysis of Postal Price Elasticities was commissioned after the 2010 ruling. It addresses some of the economic issues of price elasticity when raising postal rates.
The study conclusions are suspect because they're exactly the broad conclusion the USPS feels is needed to support an exigent increase. The conclusion that postal products are inelastic has a significant bias. Why the bias? The business study was commissioned by the USPS. It concluded that price is inelastic, which is the conclusion it needed to pave the way for an exigent price increase.
What's missing from its analysis? The study should dive deep in the data of the relative price elasticity of First Class mail, Standard mail and periodicals. The study lays out the vastly different elasticity depending on the class of mail. Elasticity ranges in 2012 are very significant (the higher the number, the more a postage increase affects volume):
- First Class letters: .09
- Work-shared First Class: .39
- Parcels: .21
- Periodicals: .12
- Standard Mail (ECR): .70
- Nonprofit: .30
- Nonprofit ECR: .56
You should not add all these classes of mail together and make the blanket conclusion that all mail is inelastic. Over the past several years, carrier route mail has been the one class of mail that's proven to be elastic - i.e., changes in postal costs have resulted in net decreases in revenue. Standard ECR mail has a price history showing that it's been elastic or very close to elastic (in stark contrast to the other subclasses of mail):
- 2005 1.09
- 2006 1.07
- 2007 .77
- 2008 .91
- 2009 .83
- 2010 .72
- 2011 .78
- 2012 .70
What the USPS doesn't examine is the revenue and profitability implications of price increases on the most elastic portion of Standard mail. Overall Standard mail is the most elastic in terms of price increases resulting in decreases in volume. If Standard ECR mail has a history of price increases actually resulting in revenue decreases or only tiny revenue increases, what's the loss in profitability from the loss in volume? It appears that the price increases result in a loss of top-line revenue and inevitably a loss in bottom-line profitability for carrier route sub mail.