Online sellers could face higher shipping costs as a result of today’s ruling by the Postal Regulatory Commission (PRC), which ruled that the USPS must attribute a greater percentage of its “institutional costs” to Competitive products, which include Priority Mail, Priority Mail Express, and First-Class Package Service.
The current requirement for Competitive products is 5.5 percent of USPS institutional costs. For Fiscal Year 2019, the appropriate share is 8.8 percent. And under today’s ruling, the appropriate share will be updated annually, leaving the door open to higher costs for Competitive products each year.
The USPS warned that setting the minimum contribution level too high could force it to raise prices artificially in order to meet the new requirement – “a result that would harm the Postal Service, its customers, and American consumers,” it wrote in its April filing with the PRC.
The ruling could have a broader impact on shippers: if the USPS was forced to continually raise shipping rates artificially, UPS and FedEx might feel emboldened to raise their rates higher than if they faced more competitive rates from USPS.
Amazon also believes raising the attributable costs could result in higher costs for shippers and believes it could have serious repercussions not only for shippers, but for the Postal Service itself. In its April filing with the PRC, it warned of the possibility “that the Postal Service’s private competitors will succeed in their attempts to suppress price competition by obtaining an increase in the “floor” for the share of institutional costs to be borne by the Postal Service’s competitive products.”
It said if the floor is set too high, “the Postal Service would be forced to increase its prices.” And if the Postal Service were required to set prices at an arbitrary price floor that results in supracompetitive pricing, USPS competitors could accelerate their own price increases to raise their profits.
Alternatively, competitors could hold down their own prices, causing “a devastating loss of volume and contribution that would impair the Postal Service’s operations and potentially its ability to remain viable (or some combination of both).”
“Private competitors would gain and the public would lose,” Amazon warned.
UPS disagreed. In its September filing with the PRC, UPS said the Postal Service “has a natural incentive to load up its market-dominant products with its common costs – including those that are mainly associated with competitive products.”
UPS said the practice distorts competition and gives the Postal Service an artificial cost advantage over the private sector. “Private firms, like UPS, do not have a set of captive monopoly customers upon whom they can thrust common costs. Private firms must recover all of their own common costs through the products they sell in competitive markets.”
Market Dominant vs. Competitive Products
Market dominant products are those products over which the Postal Service exercises sufficient market power to effectively set prices substantially above costs, raise prices significantly, decrease quality, or decrease output, without risk of losing a significant level of business to other firms offering similar products.
Competitive products consist of all other Postal Service products, including Priority Mail, Priority Mail Express, and First-Class Package Service (FCPS).
Attributable vs Institutional Costs
Attributable costs are costs that are assigned to specific products on the basis of reliably identified causal relationships.
Institutional costs are residual costs that cannot be specifically attributed to either market dominant or competitive products through reliably identified causal relationships. (Examples of institutional costs include the Postmaster General’s salary and building project expenses.)