Market-Based Cost Allocation Principles for Postal Services

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The question of how to price postal services poses problems of economic theory and public policy, and it has been the subject of no small amount of controversy. The factors that make this problem difficult are well known. Postal authorities are often required for public policy reasons to charge uniform prices for core letter-mail services that entail some degree of cross-subsidization across classes of core service customers. For example, urban and rural users might pay identical rates despite the higher cost of serving low-density locations. For this reason, postal authorities typically enjoy a statutory monopoly in the provision of core postal services. Usually they are organized either as government departments or as government-sponsored enterprises. In addition, many postal authorities use their common network of offices, processing plants, and transportation assets to provide a wide range of different services, including some that might compete with services offered by private firms.

In this article, we propose a market-based procedure for assigning costs to groups of postal services. Our proposed procedure is based upon the conceptual experiment of splitting the postal authority into parallel organizations—one charged with the provision of “core” postal services, and the other charged with the provision of “diversification” services. This split recognizes the traditional rationale for the public provision of basic postal services—that is, to provide a system of communication that is universally available at uniform rates to all citizens. Our procedure for assigning costs is then based on the outcome of a hypothetical auction in which the provider of core services accepts bids from other organizations for the right to use its network of facilities to provide additional services. We argue that the amount bidders would be willing to pay in such a hypothetical auction should be included as a cost that should be recovered in the rates charged for these additional services. Following such a procedure would require the postal authority to reflect in its rates for competitive services the full opportunity costs of the assets used to provide these services.

This approach recognizes the potential efficiencies that might be realized by using the postal network to provide a wide array of services. However, we argue that the efficiencies realizable from the postal network properly belong to the core organization it was created to serve. The implication of this stance is that the gains that can be realized from the provision of a wide array of services should properly be used to defray the cost of the core services.

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Cite as

Franklin M. Fisher, Kevin Neels & Harry Foster, Market-Based Cost Allocation Principles for Postal Services, 2 Criterion J. on Innovation 147 (2017).