Pricing 'Competitive' Postal Products

Abstract

The US Postal Service (USPS) provides “market dominant” services on an exclusive ba-sis, e.g., first class mail, and “competitive” services in markets with other rivals, e.g., parcel delivery. Rivals in the competitive market have long complained that USPS underprices if not cross-subsidizes its competitive offerings. I ask what prices of the monopoly and competitive services maximize net economic welfare across the market dominant and competitive service markets. With perfect competition, USPS should charge the market price and use the profits to finance reductions in market dominant service prices. If the regulated firm faces a fringe, Ramsey rules hold based on the elasticity facing that firm, recognizing fringe supply share and elasticity. If the rival offers a differentiated product, we find, fol-lowing Prieger (1996), that the regulated firm’s price in that market should exceed the Ramsey price because the rival sells too little. This price will be the target if pricing in the differentiated competitive market is simultaneous rather than sequential. Application is complicated if USPS, as a publicly-owned enterprise, is not profit-maximizing.

Keywords: Postal pricing, Ramsey pricing, differentiated markets, regulation

JEL Classification: L51, L87, D42