- Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 3: Is demand for market-dominant products of the United States Postal Service becoming more own-price elastic?
The adoption of Internet-based communications and the most severe economic downturn in eight decades have combined to reduce dramatically the demand for traditional postal services. Mail volume in the United States in 2012 was 160 billion pieces, 25 percent less than its peak of 213 billion pieces in 2006. The 2012 volume level is roughly the same as in the late 1980s despite a population increase of 80 million and an increase in delivery points of 37 million. To make matters even worse, the vast majority of the decline in volume came from the United States Postal Serviceís (USPS) most profitable products, First-Class Mail and Standard Mail. One possibility to offset the adverse financial effects of a volume decline is to raise the prices for US postal services. Prior to the passage of the Postal Accountability and Enhancement Act (PAEA) in late 2006, US postal regulation was essentially a cost-of-service system under which USPS periodically raised prices to produce approximately break-even revenues. Price increases were pursued because mailer demand was regarded as price inelastic, in which case price increases raise total revenue net of volume losses due to the price change. Since the passage of PAEA, price increases for ëmarket-dominantí products have been subject to a price cap limiting increases to the rate of consumer price inflation, though PAEA allows above-inflation increases under exigent circumstances.
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