Brattle Principal Kevin Neels recently co-authored an article published in The Criterion Journal on Innovation, discussing the economic theory and public policy challenges presented by pricing postal services and a proposed market-based procedure for allocating costs.

The article, “Market-Based Cost Allocation Principles for Postal Services,” proposes a market-based procedure for assigning costs to groups of postal services, which are often required for public policy reasons to charge uniform prices for core letter-mail services that have some degree of cross-subsidization across classes of core customers. As a result, postal authorities typically experience a statutory monopoly.

As a solution, the authors’ proposed procedure is based upon the conceptual experiment of splitting the postal authority into two parallel organizations–one to provide “core” postal services, the other to provide “diversification” postal services–in hopes of providing a system of communication that is “universally available at uniform rates to all citizens.” The proposed procedure for assigning costs is then based on the outcome of a “hypothetical auction in which the provider of core services accepts bids from other organizations for the right to use its network of facilities to provide additional services.” The authors argue that the amount bidders would be willing to pay in a hypothetical auction should be included as a cost that should be recovered in the rates charged for the additional services. This procedure would require the postal authority to reflect the full opportunity costs of the assets used to provide these services in its rates for competitive services.

Furthermore, the authors argue that the potential efficiencies of the postal network belong to the core organization it was created to serve. With this procedure in place, the gains that can be realized from the provision of a wide array of services should properly be used to account for the cost of the core services.

The article can be read in its entirety on The Criterion Journal on Innovation website.

View Article