Losing The Battle With E-mail Signals End For USPS

by Sean Tuffnell

Not rain, nor sleet, nor snow nor hail will keep this messenger from his appointed rounds. E-mail? Well that's another story.

The United States Postal Service is nervous. According to a General Accounting Office report delivered to a congressional committee this October, competition from online transactions could threaten the Postal Service's ability to stay in the universal mail delivery business.

Even though the USPS's revenue this year has reached an all-time high, the government sees trouble brewing on the horizon. You see, more bills are being sent and paid electronically over the Internet these days. Combined with their already heated competition from large parcel and express mail companies, these new "e-payments" are expected to cause a significant drop in first-class mail beginning in 2003.

In fact, the government expects this trend towards electronic communication and commerce will cost the USPS $17 billion in revenue over the next ten years as first-class mail volume is predicted to peak in 2002 and then decline at an annual rate of 2.5 percent. As first-class mail is currently the core of the USPS's business, representing 60 percent of its $62 billion in annual revenue, such a decline would likely create severe financial and performance challenges.

To make up for the tremendous drop in revenue, the USPS will have to either cut the number of days which mail is delivered, close facilities or raise postal rates by a significant margin.

The financial dilemma facing the postal service raises a difficult question. In the Information Age, should we maintain the government's legal monopoly on first class mail, or is it time to abolish the USPS and open up the market to competition?

How did the legal monopoly come about? When the Constitution was ratified, it granted Congress the power "to establish post offices and post roads." The Constitution's vagueness on the government's right to exclusivity, however, left the issue open for debate. That was until 1792, when Congress passed the Private Express Statutes (PES) which prohibited the private carriage of "letters and packets other than newspapers" and provided a single exception for carriage by "special messenger."

The service underwent a few minor changes over the years, but the government's monopoly remained intact.

Then in 1978 came the first major attack on the postal service's monopoly. That was when the parcel and express mail markets were opened to the private sector with the passage of the so-called "urgent letter" exception, which allowed for the overnight delivery of certain time-sensitive documents by private companies. This change spawned Federal Express, Airborne, etc. If there was ever any question as to whether the private market could handle mail delivery, this should have answered it.

Now, it's hard to turn on the TV without seeing a commercial from one of the many companies vying for your business. To maintain their "marketshare" the USPS has had to get in the act with their own ads pleading for consumers not to invest their communication dollars in private enterprise but rather, in government. Despite this change, the USPS still holds the exclusive right to carry letter mail.

The argument that is made for keeping the letter mail monopoly is the same as the one that created it in the first place. The federal government should have a "natural monopoly" because they are the only ones who could guarantee the delivery of letters between any two locations, however remote, at uniform rates. While this may have been the case in the days of the pony express, it's not the case anymore.

The reason? So-called "natural monopolies" typically occur when technology yields declining marginal costs up to a scale (volume of service) that can supply a whole market. Therefore, the first supplier to exploit a technology will be able to under-price subsequent would-be competitors. If the characteristic of decreasing average marginal costs did exist in postal markets, an economic justification for a single mail delivery service could be made.

The USPS, however, is not a capital-intensive industry. Despite its commitment to serve every address it is not characterized by a fixed physical distribution network like gas and electric utilities. Instead, the USPS is a labor-intensive operation with a flexible human delivery system. Hence, it is not a natural monopoly in the usual sense of the term.

I have nothing against the fine men and women of the USPS. But I do believe that government should only involve itself domestically in those areas where there is a void in the marketplace that cannot and would not be filled otherwise. Since this is not the case in mail delivery anymore, the USPS should divest itself and let private enterprise take over.