Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 14: Negotiated Volume Discounts in a Regulated Post
* Matthew H. Robinson, Margaret M. Cigno and J.P. Klingenberg 1. INTRODUCTION In 2002, the US Postal Service (USPS) proposed to implement a ground-breaking deal with Capital One Services, Inc., then the largest user of First-Class Mail® in the United States. This negotiated service agreement (NSA), as it was termed, represented a signiﬁcant departure from the tariﬀ rate structure that has historically been employed for domestic rates. For the ﬁrst time, volume-based discounts were oﬀered to encourage growth in First-Class marketing mail. The agreement consisted of two main features. The ﬁrst feature was a cost-based proposal to provide Capital One with electronic notiﬁcations when its First-Class solicitations were found to be undeliverable, in lieu of physical return of such pieces.1 The second feature was a schedule of discounts designed as declining blocks, whereby Capital One would pay lower marginal rates as its First-Class volume achieved certain volume thresholds. The duration of the agreement was three years. After review by the Postal Rate Commission (PRC),2 the agreement was approved with the addition of a constraint that the total amount of discounts from the declining block provision could not exceed the estimated savings from the cost reduction provision. Four more customized agreements have since been approved and implemented, as has a oneyear extension of the Capital One agreement. In addition, two other agreements have been proposed.3 Volume discounts in regulated posts are becoming more common, partly as a means of stemming diversion to electronic alternatives. There is a risk...
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