Can the U.S. Postal Service be considered a monopoly in first-class mail? Why or why not?
Explain the barriers to entry in this market.
What has happened to the price elasticity of demand for first-class mail in recent years?
What situations in this market create price discrimination?
Below is the reference text:
The Mail Monopoly
The U.S. Post Office was granted a monopoly in 1775 and has operated under federal
protection ever since. In 1971, Congress converted the Post Office Department into a
semi-independent agency called the U.S. Postal Service, or USPS, which had total
revenue of about $70 billion in 2009. Because of the national recession, revenue in 2009
was down 9 percent from 2008 and about the same as in 2006. More than 650,000
employees at 37,000 post offices deliver an average of 177 billion pieces of mail a year to
144 million home and business addresses. This amounts to about 40 percent of the
worldâs total mail delivery. USPS pays no taxes and is exempt from local zoning laws. It
has a legal monopoly in delivering regular, first-class letters and has the exclusive right to
use the space inside your mailbox. Other delivery services such as FedEx or UPS cannot
deliver to mail boxes or post office boxes.
The USPS monopoly has suffered in recent years because of rising costs and growing
competition from new technologies. The price of a first-class stamp climbed from 6 cents
in 1970 to 44 cents by 2010âa growth rate twice that of inflation. Long-distancephone
service, one possible substitute for first-class mail, is much cheaper today than in 1970.
New technologies such as email, ecards, online bill-payment, text messaging, and socialnetworking
sites also displace USPS delivery services (email messages now greatly
outnumber first-class letters). Because its monopoly applies only to regular first-class
mail, USPS has lost chunks of other business to private firms offering lower rates and
better service. The United Parcel Service (UPS), for example, is more mechanized and
more containerized than the USPS and thus has lower costs and less breakage. The USPS
has tried to emulate UPS but with only limited success. After Hurricane Katrina, it took
seven months to reopen the USPS processing and distribution center in New Orleans.
Rivals UPS, FedEx, and DHL all restored service within three weeks.
When the Postal Service raised third-class (âjunkâ mail) rates, businesses substituted
other forms of advertising, including cable TV, telemarketing, and the Internet. UPS and
other rivals now account for most ground-shipped packages. Even USPSâs first-class
monopoly is being threatened, because FedEx and others have captured 90 percent of the
overnight mail business. Thus, USPS is losing business because of competition from
overnight mail and from new technologies.
USPS has been fighting back, trying to leverage its monopoly power while increasing
efficiency. On the electronic front, USPS tried to offer online postage purchases, online
bill-paying service, and online document transmission service. But these new products
were scrapped as failures. Changing technology and competition have been eroding
USPSâs government-granted monopoly. USPS lost about $4 billion in 2009 and said that
without drastic changes, losses would total $238 billion over the next decade. Even a
legal monopoly can lose money. Proposed changes include postage increases and
dropping Saturday delivery.
Sources: Corey Dade, âPost Office Renews Campaign to End Saturday Mail Service,â
Wall Street Journal, 3 March 2010; Liz Robbins, âPostal Service Revives Cutback
Plans,â New York Times, 2 March 2010; âThe Trap: The Curse of Long-term
Unemployment Will Bedevil the Economy,â The Economist, 14 January 2010; and the
USPS home page at http://www.usps.com.
