A Critical Examination of the USPS Study of Postal Price Elasticities

There's a lot that's simply wrong in the Analysis of Postal Price Elasticities report. The USPS wants to use the study to frame the case for an across-the-board postage increase. The logic breaks down however when it attempts to use the data to frame a conclusion that's not supported by the data. Where does their logic break down?

• The USPS has data showing that various kinds of mail (First Class, Standard Mail and Periodicals) have widely varying changes in volume from a price increase perspective. But it leaps from this wide-ranging set of elasticities to the conclusion that all mail volume is inelastic. The data points to a different set of conclusions, namely that First Class mail is the least elastic and that carrier route mail is the most elastic type of mail. Furthermore, that within some broad groups of mail that are relatively inelastic there are portions of that mail that are very elastic in terms of volume when costs are increased. The post office needs to slow the decline in mail volume; to do that it needs to be aware of the types of mail that are price sensitive and protect that profitable mail volume by pricing to maximize volume for those price-sensitive classes of mail.

• The data shows that carrier route mail is at a tipping point where cost increases will result in revenue decreases. This should lead to the conclusion that it would be irrational to increase carrier route postage.

• All the price elasticity data shows that some volume is lost across all the categories of mail when costs increase. The point the study makes is that the cost increases result in higher revenue even though volume is inevitably lower. What the study fails to address is that the reason for the need to raise postal costs is because volume is decreasing! The study identifies two reasons for volume decline (the growth of the internet and the Great Recession), but fails to mention, let alone quantify, what portion of the decline in volume is the straightforward result of increasing costs. The data clearly shows the huge decline in bulk mail volume that was triggered by the 2007 postal cost increases, but never addresses that postal cost increases cause volume to decline. The report glosses over that by making the case that the increased revenue offsets the increase in costs.

• If you follow its data to a logical conclusion, then the USPS should raise prices almost exclusively on First Class mail and other subclasses of mail that are most inelastic. Why would the USPS even consider raising costs on mail volume that's price sensitive when it's identified that the existential threat to the post office is an ever-declining volume of mail? The answer in the past was it's politically easier to raise the cost of all subclasses of mail a little bit rather than raise the cost of First Class mail a lot and leave the cost of bulk mail alone. The U.S. Postal Service's study on price elasticity shows clearly that a pricing formula based on raising all mail costs is wrong. If you accept its price elasticity argument, then it follows that the price increases should be imposed on First Class mail and the other inelastic subclasses of mail.

• The post office's argument revolves around the narrow issue of whether price increases will result in incremental revenue. There's no discussion of whether the greater revenue translates into greater profit. Carrier route mail is profitable volume for the post office. Does cutting out profitable volume result in higher profits or just simply higher top-line revenue?

The conclusions the USPS draws from this report simply don't follow the data. The conclusions seem to be exactly what the USPS thinks it needs in terms of economics to back up its economic analysis requirement to ask for an exigent price increase. This study attempts to address the statutory requirement of "extraordinary circumstances" and provide an underlying economic analysis to back up the case for a postal cost increase. The study doesn't provide justification for an exigent increase and is ultimately not a supportable economic argument when it comes to justifying an increase in postage for Standard mail and ECR mail.

Jim Coogan is the founder and president of Catalog Marketing Economics, a consulting firm focused on catalog circualtion planning. Jim can be reached at jcoogan@earthlink.com.