Freeman

ARTICLE

First-Class Mail, Third-Class Competition

Is the Post Office a Natural Monopoly?

APRIL 01, 1995 by RONALD M. AYERS, ROBERT A. COLLINGE

Robert A. Collinge and Ronald M. Ayers are Associate Professors of Economics at the University of Texas at San Antonio.

Picture a storefront in a strip mall. “Letter Express” declares the facade. On display in the window is the sign: “Why pay 32 cents and worry if it gets there on time? Guaranteed letter delivery anywhere in the country within two days for $3.” You have a letter to mail. Not an urgent letter, but you’d just as soon have it get there sooner rather than later. You enter the store and hand over your letter and $3.

“You’re under arrest! You have the right to remain silent. You have the right to an attorney. . . .” Yes, you have broken the law, by stumbling into a “sting” operation by the United States Postal Service. You have stolen 32 cents from the Postal Service, and will be forced to hand it over, along with a fine.

Okay, we exaggerate. In reality, the U.S. Postal Service (USPS) does not run sting operations, and has yet to seek significant punitive damages from letter senders. Still, it could. Indeed, the Postal Service does seek damages from businesses that employ overnight mails for non-urgent billings or the like. For each such letter mailed via FedEx or another private company, the sender by law must pay first-class postage to the USPS. The USPS intends for that law to be enforced.

The Natural Monopoly Scam

The post office is an example of a legal monopoly. Why does our government prohibit free choice when it comes to selecting a company to transport mail? Judging from the many firms that survive in the package delivery business, it is likely that competition could thrive for letters as well. Different firms could carve out different niches by offering different combinations of price and service. Of course, some view competition less favorably.

One claim is that postal service is a natural monopoly, so that one firm is able to serve the market more efficiently than could multiple firms. We are told that government restriction is necessary because it would be too costly and confusing to allow more than one company to operate. Without such limitation, the argument goes, there would be a complicated and expensive mess of overlapping routes, along with a proliferation of mailboxes to serve each of the various carriers. Supporters of government regulation worry that customers would wind up footing the bill for such inefficiencies. They are wrong.

If the post office were in fact a natural monopoly, competition would reward firms for getting larger and larger, until only one survived. Unlike the current bureaucratic arrangement, the surviving firm would obtain that status by offering the most valuable combination of service and price. Costs would be competed to as low a level as possible.

Again, if for the sake of argument, we accept for the moment the notion that the post office is a natural monopoly, we must acknowledge that there is a great deal of potential competition from package delivery services, couriers, telephone services, and fax. Such competitors “lurking in the wings” would motivate the purported natural monopolist to keep prices low and quality high. No regulation would be necessary or even desirable. Thus, one justification for government’s legal guardianship over the post office is demonstrated to be false, Is there another rationale?

Politics

The justification is political. Surveys routinely show that, at a personal level, the American public holds postal workers in higher esteem than nearly any other category of worker. Perhaps this is because millions of Americans look forward to receiving the mail each day. Whatever the reason, there is widespread support for mail carriers. So, when postal employees throughout the country argue to maintain the status quo, is it any wonder that most Americans support them?

Postal. employees themselves have every reason to support the status quo. Mail carriers are among the most highly paid unskilled labor in the country, with annual salaries averaging nearly $30,000. Including fringe benefits, 1991 compensation for USPS employees averaged nearly $45,000.[1] Salaries are much higher than necessary to attract qualified applicants, as thousands of unsuccessful postal job seekers can attest. With popular postal employees throughout the country supporting the status quo, and with a powerful lobbying effort by the postal workers’ union, it is no wonder that Congress is reluctant to open the doors to competition.

There is no strong lobby on the other side. While there are an increasing number of complaints about slower and less reliable service than in the past, the general attitude among the public is “if it ain’t broke, don’t fix it.” The post office seems to work adequately, and is cheaper and more reliable than state postal systems found in other countries. Closer analysis reveals that those other countries also take the government monopoly route, and often have less well-developed markets and infrastructures to keep costs down. However, studying postal services is not a priority in customers’ lives, so they pay little attention to the details.

Voters in rural areas also have a compelling interest in maintaining the status quo. Rural residents can send and receive mail daily at the same rates paid by urban dwellers. Since the cost to the post office is much higher in sparsely populated areas, rural mail is implicitly subsidized by urban mail. A government could maintain these subsidies if postal services were to become competitive. In that case, though, the subsidies would need to be explicit. The costs of subsidizing rural pick-up and delivery would then be a visible expense in the federal budget.

Congress shows little interest in debating whether all Americans should have a right to uniform postal service at uniform cost. Yet such a debate could be expected if the expense of subsidizing rural routes is no longer hidden within common postal rates. The higher the profile of the subsidies, the more likely they are to be cut. Urban residents are likely to balk when they see the monetary cost of subsidizing rural lifestyles, especially when all rural residents are there out of choice. For their part, rural residents can best protect their subsidies by keeping the issue out of the spotlight.

Honesty and Good Policy

There are many good reasons to allow competition in the market for first-class mail, and no good reason for the government to be one of the competitors. Competition keeps costs down, and matches services to what customers are willing to pay for. In contrast, restricting competition stifles innovation. Is it worth fining users of alternative services in order to force them to use what they obviously view as inferior service from the United States Postal Service? How far does this go—do we seek to eliminate the substitution of faxes for letters? Do we fine fax users? Do we fine users of the Internet?

Honesty requires us to address the question of rural subsidization explicitly. Likewise, if postal employees have some special status that merits above-market pay’, then government could subsidize their wages explicitly. Such an elite status would prove hard to justify. Neither questions of rural subsidization nor high postal pay are valid reasons to prohibit postal competition. If economically and ethically valid reasons do exist, no one has yet stated them.

The essence of competition is privately owned firms facing off against each other in order to provide the best value to the customer. When the USPS does battle with private firms, a portion of the tax dollars paid by those private firms is spent to hamper their ability to compete against the government monolith, the USPS. That’s not efficient, and that’s not fair. Ultimately, policy that is open and honest must allow enterprise the unhampered freedom to compete. Not only should government allow competition, but it should sell off its Postal Service assets, and exit the business. A level playing field in business enterprise does not allow the government to be one of the competitors!


1.   U.S. Department of Commerce, Statistical Abstract of the United States, 1993 (Washington, D.C.: U.S. Government Printing Office).

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April 1995

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