FTC Staff Comment Before the Postal Rate Commission in Support of Study of an Exemption From Private Express Statutes and Alternative Proposal

V890037
COMMISSION AUTHORIZED
BEFORE THE
UNITED STATES OF AMERICA POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-001
Complaint of the TCMA, 1989 	Docket No. C89-1
BRIEF, IN THE FORM OF COMMENTS, OF
THE STAFF OF THE BUREAU OF ECONOMICS OF THE
FEDERAL TRADE COMMISSIONl
(submitted February 28, 1989)
I. 	INTRODUCTION
The staff of the Bureau of Economics of the Federal Trade Commission
(FTC) 	appreciate 	the 	opportunity 	to 	submit 	these 	comments 	to 	the 	Postal
Rate Commission (PRC) in support of a complaint by the Third Class Mail
Association (TCMA), Docket No. C89-1, requesting a study of an exemption
from 	the 	private 	express 	statutes 	which 	are 	administered 	by 	the 	United
States Postal Service (USPS). 	We also offer an alternative proposal, which
involves granting a rate discount for privately delivered addressed third class
. 	qlail~2 should the PRC reject the TCMA's complaint. 	We take no position on
-.the PRC's jurisdiction in this matter.
The TCMA's complaint requests that the PRC investigate and report on
whether 	the public interest would 	be served 	by exempting addressed 	third
1 These comments represent the views of the staff of 	the 	Bureau of
Economics of the Federal Trade Commission. 	They are not necessarily the
views of the Commission or any individual Commissioner. 	Questions about
these 	comments 	may 	be 	addressed 	to 	John 	C. 	Hilke, 	Federal 	Trade
Commission, Bureau of Economics, 6th Street and Pennsylvania Avenue, N.W.,
Washington, D.C. 20580, telephone: (202) 326-3483.
2 Private firms are currently allowed to deliver unaddressed third class
items, usually by placing an item at every household in an area. 	Delivery of
addressed third class mail is currently part of the monopoly of the USPS.

class mail from the private express statutes. 	The TCMA filed the complaint
after the USPS declined to initiate a rulemaking proceeding on the subject.
We 	support 	consideration 	of 	the 	issues 	raised 	in 	the 	TCMA's 	complaint
because we believe that substantial benefits to consumers from improved mail
service, 	lower 	postal 	costs, 	and 	perhaps 	lower 	prices 	on 	advertised 	goods
generally could result from implementation of the proposed exemption.
II. 	FEDERAL TRADE COMMISSION STAFF EXPERTISE
The FTC is an independent regulatory agency responsible for fostering
competition and safeguarding the interests of consumers. 3 	The staff of the
. FTC, upon request by federal, state, and local government bodies, regularly
analyze 	regulatory 	or 	legislative 	proposals 	that 	may 	affect 	competition 	or
the efficiency of the economy.
The FTC staff have commented on several 	previous issues 	before the
." -iRC, including: (I) use of a single set of rate hearings to establish a series
of rate changes;· (2) elaboration of competition issues inherent in proposed
rate and classification changes related to electronic computer originated mail
(E-COM);5 (3) drawbacks to proposed modification of the test period for cost
recovery 	in 	E-COM;e (4) 	advantages of setting 	E-COM 	rates 	to 	cover 	full
3 IS U.S.C. Section 41 ~ ~.
• PRC Docket No. MR82-3, filed November 4, 1982.
6 PRC Docket No. R83-I, filed June I, 1983.
6 PRC Docket No. R83-I, filed June 16, 1983.
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.' costs;1 (5) 	costs 	and 	benefits 	of 	current 	preferred 	mail 	rates;8 	and, 	most
recently, 	(6) 	expedited 	procedures 	in 	reviewing 	proposed 	rate 	changes 	for
Express Mail.~
III. 	THE COMPLAINT
The basic economic question presented by the complaint of the TCMA
is whether cost considerations require including addressed third class mail in
the postal letter monopoly. 	The TCMA believes that cost conditions do not
require inclusion of addressed third class mail, but it also acknowledges that
current empirical information is insufficient to determine this for certain.
An exemption might be economically justified either if costs for first
class and other letter mail would be largely unaffected by it or if efficiency
improvements resulting from increased private delivery services would exceed
any increase in costs for first class and other letter mail. 	Information on
- .... .~ , 150th cost and quality of service effects of the proposed exemption appears
to 	be 	sparse. 	Nevertheless, 	the· USPS 	declined 	to 	conduct 	an 	inquiry 	to
determine 	whether 	granting 	the 	requested 	exemption 	would 	have 	an
1 PRC Docket No. R84-1, filed December '23, 1983.
8 PRC Docket No. SS86-1, filed April 20, 1986. 	Preferred mail receives
a rate discount because the contents of such mail are considered beneficial
to 	the 	public. 	Preferred 	mail 	discounts 	arc 	granted, 	for 	example, 	for
educational materials and for mailings of nonprofit organizations. 	Congress
reimburses the USPS to make available these discounts for 	preferred 	mail.
Other types of postal discounts arc justified on the basis of lower costs.
~ PRC Docket No. RM88-2, filed October 14, 1988.
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appreciable 	effect. on 	costs 	for 	first 	class 	and 	other 	letter 	mail. 	The
petitioner now asks the PRC to initiate such an inquiry.
An exemption for addressed third class mail could increase the costs of
delivering first class and other letter mail if mail delivery exhibits economies
of scope. 10 	If 	the 	costs of delivering 	nonexempt 	mail 	would 	increase, an
exemption for addressed third class mail might be ill-advised. 	If exempting
third class mail would not have this effect, however, an exemption might be
in the public interest.ll
10 The proposed exemption might increase the costs for first class mail
and 	other 	letter 	mail 	if 	the 	USPS 	has 	achieved 	economies 	of 	scope 	in
processing 	different 	classes 	of 	mail 	and 	achieved 	economies 	of 	scale 	in
processing 	individual classes of mail. 	An "economy of scope" exists 	when
the 	cost 	of 	providing 	a 	good 	or 	service 	is 	lower 	if 	it 	is 	produced 	in
conjunction with another good or service than if it is produced alone. 	By
comparison, 	an 	"economy 	of 	scale" 	exists 	when 	the 	per 	item 	cost 	of
providing a single good or service decreases as the quantity of production
increases. 	Economies of scope and scale may exist simultaneously.
11 If there are sufficient economies of scope between addressed 	third
class mail and first class and other letter mail, the USPS monopoly in both
types 	of 	mail 	may 	be 	self-sustaining. 	If 	it 	is 	self -sustaining, 	no 	legal
restrictions 	on 	entry, 	such 	as 	the 	private 	express 	statutes, 	should 	be
necessary. 	A natural monopoly (where average costs decline over the whole
range 	of 	output) 	providing 	two 	or 	more 	products 	is 	said 	to 	be 	self-
sustaining if no entry could profitably take place against the monopoly at
the current prices. 	Self-sustainability of a natural multi-product monopoly is
unlikely when there are no entry barriers, economies of scope between the
products are small, economies of scale in the production of each product are
large, 	and 	the 	products 	of 	the 	monopolist 	are 	good 	substitutes 	for 	each
other. 	(See 	Baumol, 	W., 	J. 	Panzar, 	and 	R. 	Willig, 	"On 	the 	Theory 	of
Perfectly-Contestable Markets," in Stiglitz, J., and G. Mathewson, Eds., ~
Developments 	in 	the 	Analysis of 	Market 	Structure, Cambridge, Mass.: 	MIT
Press, 	1986, 	pp. 	339-370.) 	Opponents 	of 	the 	proposed 	exemption 	may 	be
concerned 	that 	these 	four 	conditions 	apply 	to 	the 	USPS. 	The 	TCMA's
proposed study by the PRC could evaluate whether the cost conditions facing
the USPS are consistent with a natural monopoly model and with attendant
concerns about the sustainability of such a natural monopoly.
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An 	exempti08 from 	the 	private express statutes could 	also 	be 	in 	the
public interest. even if an exemption increased some of the costs for 	first
class and other letter mail. provided that (a) private delivery services would
be more efficient.12 and (b) the gains from such private delivery would be
sufficient 	to 	outweigh 	any 	increased 	costs 	of 	first 	class 	and 	other 	letter
mail. 	Net 	cost 	reductions 	or 	improved 	service 	could 	ultimately 	benefit
consumers by 	lowering advertising costs (and potentially lowering prices),13
and 	encouraging 	distribution 	of 	better 	or 	more 	timely 	information 	about
products that consumers might wish to buy.
In summary. there is a potentially strong public interest rationale for
exempting addressed third class mail from the private express statutes. 	The
USPS 	declined 	to 	develop an 	analysis of 	the cost structure 	of 	third 	class
mail 	that 	could 	lead 	to 	an 	informed 	decision 	on 	the 	desirability 	of 	an
exemption 	for 	addressed 	third class mail. 	If the PRC determines 	that its
jurisdiction covers the concerns raised in the TCMA's complaint. we urge the
'~' ..,.
12 One 	of 	these 	efficiency 	effects 	could 	be 	a 	more 	efficient 	USPS
resulting from increased competition between the USPS and private addressed
third class mail delivery firms.
IS Addressed 	third 	class 	mail 	consists 	largely 	of 	advertising. 	If
exempting addressed third class mail would reduce the (marginal) advertising
costs 	of 	goods 	(and 	services) 	that 	advertise 	by 	this 	means, 	and 	if 	these
goods are sold in competitive markets, then exempting addressed third class
mail 	service 	could 	lead 	to 	lower 	prices 	for 	such 	goods. 	In 	addition, 	if
advertising through addressed third class mail competes with other forms of
advertising. exempting addressed third class mail might increase competition
in advertising services, thereby generally reducing advertising costs of goods.
If costs of all advertised goods would be reduced by the exemption. and if
these 	goods 	are 	sold 	in 	competitive 	markets, 	then 	an 	exemption 	for
addressed third class mail could generally lead to lower prices for advertised
goods.
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PRC 	to 	consider ,providing 	a 	forum 	in 	which 	these 	potential 	gains 	for
consumers might be assessed.
IV. 	AN ALTERNATIVE APPROACH
Although we believe that the TCMA's proposed exemption is worthy of
a 	PRC study, we realize 	that an exemption for 	addressed third class mail
has 	the 	potential 	to 	increase costs 	for 	first 	class and 	other 	letter 	mail. 14
Accordingly, we believe that the PRC might wish to consider an alternative
proposal that would continue to recognize the USPS's monopoly, compensate
the USPS for cost increases in mail that the USPS continues to deliver, and
allow more efficient private-delivery firms 	to deliver addressed 	third class
mail.
We suggest that the USPS expand its current array of rate discounts to
allow 	a 	rate 	discount 	for 	user-delivery 	of 	addressed 	third 	class 	mail.
., ..• turrently, 	private delivery 	services 	might conceivably 	distribute 	addressed
third class mail, provided that each piece has full-price-postage attached to
it. 	This 	full-price 	rate 	appears 	to 	be 	high 	in 	comparison 	to 	discounted
rates charged in other instances where private firms perform mailing tasks in
lieu 	of 	the 	USPS. 	Thus, 	for 	example, 	postal 	patrons 	who 	pre-sort 	items
(before submitting them to the USPS for delivery) are often eligible for a
discount; however, t"ose who 	might choose 	to 	perform all of 	the delivery
tasks 	for 	the same 	type 	of 	items 	would 	have 	to 	pay 	the 	same 	or 	higher
14 Low costs from private delivery of addressed third class mail might,
however, offset any cost increases within the USPS.
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rates. 15 	We propose that a discount equal to the net costs which the USPS
saves (as a 	result of someone else delivering 	the 	item) be granted. 16 	The
price of the discounted stamp for such an item of mail could then be set to
compensate the USPS for 	any increase in the cost of first class and other
letter mail.17
The proposed alternative could promote efficient and high quality mail
service, since private delivery firms would only deliver addressed third class
mail if their costs, for any given quality of service, were lower than those
16 In 	providing 	a 	pre-sort 	discount, 	the 	USPS 	has 	relied 	on 	the
principle that users deserve discounts when they perform part of the service
that 	the 	USPS 	would 	otherwise 	have 	to 	perform. 	In 	effect, 	the 	USPS
charges the user a lower price because the USPS is providing fewer services
to 	the 	user 	and 	is 	thereby 	incurring 	lower 	costs. 	In 	the 	alternative
proposal 	presented 	here, 	users 	perform 	all 	of 	the 	services 	otherwise
performed by the USPS, but recognize the USPS monopoly by paying a fee
to the USPS designed to recover cost increases brought about by any loss of
addressed third class mail volume.
The principle of charging lower prices to reflect lower costs might be
applicable to a variety of mail services, but our comments are directed solely
to treatment of addressed third class mail.
16 If the USPS's savings from granting the exemption are equal to the
current 	full-cost 	stamp. 	then 	the 	price of 	the 	discounted 	stamp should 	be
zero. 	If 	a 	price 	of 	zero 	is 	economically 	appropriate, 	then 	the 	discount
stamp approach would be functionally equivalent to the TCMA's proposal.
11 For example, assume that many third class mailers decide to deliver
their 	own 	addressed 	third 	class 	mail 	privately. 	Further assume 	that 	this
withdrawal 	of 	addressed 	third 	class 	mail 	results 	in 	direct 	delivery 	cost
savings 	for 	the 	USPS 	of $3 	billion, 	but 	increases costs of 	first 	class and
other letter mail delivery. because of lost economies of scale and/or scope,
by $500 million. 	In this situation, the USPS's delivery discounts would total
$2.5 billion. 	That is, the discount would equal the Jl£l cost savings for the
entire USPS system.
If increased costs equaled or exceeded savings. then no discount would
be 	indicated 	and 	a 	charge 	of 	at 	least 	the 	current 	postal 	rate 	would 	be
economically appropriate.
The 	appropriate 	amount 	of 	the 	discount 	for 	user-delivery 	could 	be
reexamined from 	time to time (for example. as part of the PRe's omnibus
rate hearings) to adjust for cost changes and changes in demand.
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of 	the 	USPS. 	In. determining 	whether 	this 	proposal 	promotes 	the 	public
interest, 	the 	PRC 	might 	consider 	and 	balance 	potential 	cost 	savings 	from
private delivery of addressed third class mail against any resulting increase
in the USPS's costs for first class and other letter mail. 1.
V. CONCLUSION
The 	economic 	appropriateness 	of 	the 	TCMA's 	proposed 	exemption
depends on whether a decrease in addressed third class mail volume would
substantially 	increase 	the 	USPS's 	costs 	of 	delivering 	first 	class 	and 	other
forms 	of 	letter mail. 	If such a 	linkage of costs does not 	exist, then 	the
proposed exemption may provide considerable benefits from improved service
and increased efficiency with little cost to society. 	Current information is
insufficient 	to 	answer 	this 	important 	question 	and 	to 	balance 	any 	cost
increases against potential cost savings. 	Consequently, a study by the PRC,
assuming such a study is within the PRC's jurisdiction, is likely to produce a
...• Better informed basis for considering an exemption for addressed third class
mail.
As an alternative to an exemption for addressed third class mail, the
PRC 	could 	consider 	authorizing 	a 	discount 	for 	firms 	that 	perform 	the
delivery function themselves. 	This approach may be economically attractive
because 	the 	postage 	due 	on 	privately 	delivered 	addressed 	third 	class 	mail
I' The public interest will be served best if care is taken to determine
accurately the appropriate magnitude of the -delivery discount.- 	Like other
cost 	savings calculations considered 	by 	the 	PRC, 	this 	may 	prove 	to 	be 	a
difficult determination to make and one that requires considerable time to
refine.
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could 	be set 	to compensate the postal service for 	any 	increase in 	its costs
of 	delivering 	first 	class 	and 	other 	letter 	mail 	caused 	by 	the 	exemption.
Under 	this arrangement, 	therefore, 	only 	private 	firms 	efficient enough 	to
make a profit, as well as to compensate the USPS. could afford to operate.
Thus, efficiency of delivery of addressed third class mail could be improved
while at the same time the USPS could be compensated for any increase in
its costs. 	We 	respectfully 	urge 	the 	PRC 	to consider 	this 	alternative 	if 	it
does not accept the TCMA's complaint .
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BEFORE THE
POST AL RATE COMMISSION
WASHINGTON, D.C. 20268
Complaint of Third Class
Mail Association
)
) 	Docket No. C89-1
.'
STAFF OF THE BUREAU OF ECONOMICS OF
THE FEDERAL TRADE COMMISSION
Pursuant to Rule 20 of the Postal Rate Commission's Rules of Practice,
the 	Staff 	of 	the 	Bureau 	of 	Economics 	of 	the 	Federal 	Trade 	Commission
hereby provides notice of its intervention in this proceeding by presenting
comments. 	The staff of the Bureau of Economics, as part of the Federal
Trade Commission, submit comments on matters before government bodies in
pursuit 	of 	the Commission's 	mission 	to 	improve consumer 	welfare 	through
increased competition.
Service upon the staff of the Bureau of Economics of the Federal Trade
Commission should be made by mailing copies to the following:
John C. Hilke, Staff Economist
Federal Trade Commission
Bureau of Economics
6th Street and Pennsylvania Ave., N.W.
Washington, D.C. 	20580
Respectfully submitted,
wa.~r--)
Paul A. Pautler, Deputy Director for
Economicy Policy Analysis
Dated: February 28, 1989
CERTIFICATE OF SERVICE
I hereby certify that I have this date served the foregoing document by
mail to the individuals on the service list maintained at the document room
of the Postal Rate Commission.
(-, 	/- 	,) 	'--, / 	;' ,
/~..,/:'. 	,{ .. ,/" 	~~/
J 	C. Hilke, Staff' Economist
Dated: February 28, 1989