Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 16: Do Differences in Facility-Specific Mail Processing Unit Costs Have Implications for the Cost of the Universal Service Obligation?
16. Do diﬀerences in facility-speciﬁc mail processing unit costs have implications for the cost of the Universal Service Obligation? Margaret Cigno, Diane Monaco and Matthew Robinson 1 INTRODUCTION It is widely accepted that the hallmark of universal service is ubiquity and uniformity. These traits can be applied to either a mail product, such as a uniform rate throughout the country, or to activities performed by the postal operator (PO), such as delivery six days a week to essentially all customers.1 Two methods of calculating the cost of the USO are usually employed: the net avoided cost (NAC) method and the entry pricing (EP) method. The NAC measures the loss incurred by the post attributable to providing universal service. The EP measures the ﬁnancial cost to the post of providing universal service after reducing or eliminating the reserved area. Previous work in this area has linked the cost of the Universal Service Obligation (USO) to the proﬁtability of delivery routes. (Cohen, et al., 1999, 2000; Bradley and Colvin, 2000; Crew and Kleindorfer, 2000; Panzer, 2001) The relatively ﬁxed nature of delivery costs and the large disparity in volumes per address result in wide variation in unit delivery costs across routes.2 Routes with low unit delivery costs tend to be proﬁtable to serve, while those with high unit delivery cost burden the United States Postal Service (USPS) with net losses. In these previous analyses, the upstream costs of mail processing are either excluded or assumed to be uniform...
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