Opportunities for Anticompetitive Behavior in Postal Services

Postal Reform
Antitrust law as applied to private firms is highly developed in the United States, but most postal services are at least partially government-owned. In this essay, I examine the ability of a government-owned firm to behave anticompetitively, and I consider postal services in particular. In addition to monopoly power, postal services typically enjoy numerous government-granted benefits, all of which can be used to lower prices in activities where the government-owned firm faces competition. I illustrate by detailing the government-granted subsidies, privileges, and immunities enjoyed by the U.S. Postal Service.

Such privileges give a government-owned post an artificial competitive advantage over private rivals. By artificial, I mean that the firm's competitive advantage is not based on superior management skills, more efficient technology, enhanced innovation, better negotiating techniques, or indeed on any other economic factor. The firm's competitive advantage is government created.

Anticompetitive behavior by government firms has several harmful effects. First, there is a straightforward misallocation of resources because prices are not in alignment with true economic cost. Government-owned firms may be willing to set prices below cost and keep them there without regard to long-term losses. Second, more efficient but unsubsidized private firms will shrink, not invest, or may not start up if they observe or anticipate competition from a government rival. Third, if there is uncertainty over the government firm's intention or ability to expand into a particular activity, that uncertainty will contribute to private disinvestment. Fourth, taxpayers or other captive groups will have to fund more (or all) of the overhead costs of the competitive activity, even though customers using the good or service are willing to pay for it. Finally, ventures outside of the government firm's core activity may divert resources from that core, socially beneficial activity.

Government Ownership and Anticompetitive Incentives

Government-owned (or partially government-owned) firms typically compete directly with private, profit-maximizing enterprises in important markets. Government postal firms usually offer overnight mail and package shipping services in direct competition with private delivery companies. When firms are government-owned, as are most postal services, they pursue goals other than pure profit maximization. One might suspect that they would therefore act less aggressively toward competitors than would private, profit-maximizing firms. However, the opposite is often the case.

The increased incentive of government firms to disadvantage competitors arises from policy objectives that induce those firms to value an expanded operating scale per se. The government often instructs its firms to increase employment or ensure that affordable service is provided ubiquitously. The U.S. Postal Service, for example, is charged with providing service anywhere in the United States at uniform rates across different geographic regions.

Additionally, the profit government firms are permitted to earn often is explicitly limited. The USPS is required to break even over time. Such arrangements blunt incentives for profit maximization, and instead create a system in which managerial success is measured more by scale and scope than by profit. The firm is likely to act as if it values expanded scale and scope--as reflected by revenue, for example--under such an explicit or implicit reward structure. The enhanced value placed on increased revenue or expanded output leads the firm to undertake particularly aggressive actions in pursuit of expanded output and revenue, including anticompetitive behavior against private, profit-maximizing enterprises.[1]

Anticompetitive Action

For the reasons discussed above, a government-owned firm is likely to have greater incentive to charge below-cost prices than a private firm. In addition, it typically has enhanced ability to disadvantage competitors. A government firm's ability to engage in anticompetitive behavior depends on the details of the institutional arrangements characterizing that organization.

I here review the government-granted privileges, subsidies, and immunities enjoyed by the U.S. Postal Service. The USPS is a government-owned firm. To the extent that it values output expansion, it can use those special privileges to inefficiently compete with firms that do not receive the same privileges, thus pricing below more efficient but unsubsidized private rivals.

The powers surrounding the USPS's monopolies effectively allow it to define the scope of its own monopoly. They can thus be used in unique ways to disadvantage competitors and are worth reviewing in detail. The USPS retains several key monopoly powers: a monopoly over letter delivery, a mailbox monopoly, and the ability to suspend the delivery monopoly in certain cases.

The delivery monopoly is probably the government-granted privilege that raises the greatest fear. It is a concern because the USPS provides both monopolized services (e.g., letter delivery) and competitive services (e.g., package and express mail), and can potentially use revenues from monopolized activities to cross-subsidize competitive activities.

In the United States, the delivery monopoly is over letter mail. The Private Express Statutes prohibit the private carriage of "letters or packets," and the Postal Service defines a letter as "a message directed to a specific person or address and recorded in or on a tangible object." The courts have accepted the Postal Service's broad test for a letter as, "the presence or absence of an address."

The USPS's definition of a letter, adopted by the Postal Service in 1974, differs from earlier definitions and is much more expansive. Indeed, the Post Office and then the Postal Service has consistently expanded the scope of its monopoly over a 200-year period. Such an expansive definition leads naturally to monopolization of materials not intuitively considered letters, such as bills and advertising matter, which constitute a substantial and increasing proportion of the mail stream. According to the Postal Service's definition, an addressed grocery store advertisement is a letter.

A substantial portion of USPS revenue comes from monopolized activities. In 2002, 57 percent of the Postal Service's revenues were from monopolized first-class mail, while almost 25 percent were from partially monopolized Standard Mail A (formerly third-class mail).

The monopoly is well enforced. The USPS can conduct searches and seizures if it suspects citizens of contravening its monopoly. For example, in 1993, armed postal inspectors entered the headquarters of Equifax Inc. in Atlanta. The postal inspectors demanded to know if all the mail sent by Equifax through Federal Express was indeed "extremely urgent," as mandated by the Postal Service's criteria for suspension of the Private Express Statutes. Equifax paid the Postal Service a fine of $30,000. The Postal Service reportedly collected $521,000 for similar fines from twenty-one mailers between 1991 and 1994.

The fact that the USPS holds a well-enforced letter delivery monopoly, the scope of which it effectively defines, is significant for anticompetitive behavior. Competitors or potential competitors are likely to be reticent about entering, investing in, or expanding activities where they fear competition from the USPS. Were the delivery monopoly more circumscribed, rivals would rationally be less fearful of redistribution of monopoly rents toward competitive activities.

But the USPS in fact holds two distinct monopolies. The second is a statutory monopoly over the use of private mailboxes. The Criminal Code stipulates a fine if matter on which postage has not been paid is deposited in a mailbox. The Postal Service's Domestic Mail Manual requires that mailboxes "shall be used exclusively for matter which bears postage." Additionally, the Domestic Mail Manual specifies the size, shape, and dimensions of mailboxes.

The Supreme Court, in United States Postal Service v. Council of Greenburgh Civic Associations (1981), considered the constitutionality of the mailbox monopoly on free speech grounds. It came to the unappealing conclusion that postal customers must accept a monopoly over their own mailbox in return for the privilege of being subjected to the Postal Service's monopoly over letter delivery. The Court stated that, "In effect, the postal customer, although he pays for the physical components of the 'authorized depository,' agrees to abide by the Postal Service's regulations in exchange for the Postal Service agreeing to deliver and pick up his mail."

In addition to the delivery and mailbox monopolies, the USPS has the ability to selectively suspend the delivery monopoly in certain cases. Yale law professor George Priest writes:

In the 1973 Report the Governors announce for the first time that they possess and that they will exercise the authority to suspend the private express statutes at their discretion. No Postmaster General has ever claimed the power to repeal or to "suspend" the private express statutes by administrative order. But the Governors have discovered an obscure postal regulation which will allow them, with sympathetic interpretation, to surrender bits and pieces of their exclusive grant in ways to preserve the substance of the monopoly.[2]

Exceptions include the obvious, such as "letters accompanying cargo" and "letters of the carrier" (which, for example, encompass interoffice correspondence), but also include "letters by special messenger," as well as "extremely urgent letters." The latter two exemptions allow for bicycle messengers and overnight delivery services. Although suspension of the delivery monopoly has allowed numerous businesses, such as Federal Express and DHL, to develop and thrive, it remains unclear whether Congress ever gave the Postal Service legal authority to suspend the postal monopoly.

The combination of an expansive definition of a letter combined with the ability to selectively suspend the delivery monopoly means that the USPS can effectively decide what falls under its monopoly. As James C. Miller writes:

Through its ability to define a "letter," the Postal Service is in the enviable position of being able to determine the extent of its own monopoly. While the service has "suspended" its monopoly for certain letters (such as time-sensitive materials), it has also expanded its monopoly by defining letters to include bills, receipts, IBM cards, magnetic tapes, and other business documents. Typically, as new services such as express mail have developed, the Postal Service has first asserted that these services fall within its monopoly and then announced a suspension of the monopoly with respect to some aspects of the new service.[3]

The implications for anticompetitive behavior of the delivery and mailbox monopolies, and the suspension ability, are clear. The powers related to the postal monopoly are unlike those of other utility monopolies. The USPS is able to micromanage its monopoly power to garner the greatest economic rents while mitigating potential political opposition to the monopoly through the suspension power. Those shielded economic rents can be used to compete with private rivals not enjoying monopoly power.

Concerns about the use of postal monopolies to disadvantage competitors are not limited to the USPS. The EC found that the letter-mail monopoly in Germany produced "a guaranteed source of income exceeding stand-alone cost" during the period covered by the Deutsche Post case.[4] The OECD has noted that, in the case of a public enterprise, predatory pricing is a subset of "distortionary" pricing, which does not necessarily require conventional recoupment of losses:

It is convenient . . . to label pricing below cost as "distortionary." "Predatory" pricing is a temporary form of distortionary pricing. Even where distortionary pricing does not lead to prices subsequently being raised above cost, it may still be of public policy concern, because of the effect on productive efficiency. Distortionary pricing might induce a more efficient firm to leave or to not enter the competitive market.[5]

Like Deutsche Post, the U.S. Postal Service need not recoup losses by subsequently raising prices in the competitive market. In addition to using rents from its monopoly, however, the USPS can simply earn long-term losses and remain in business. Unlike a private utility subject to rate-of-return or price-cap regulation, for example, it has substantial ability to carry losses forward into future periods of the ratemaking process. The USPS lost $200 million in 2000, $1.7 billion in 2001, and $676 million in 2002, but continues to operate. Such losses would likely have driven a private firm into bankruptcy.

There is an additional anticompetitive concern arising from the postal monopolies, however. Unlike a private firm that may find it impossible to repel entry when prices ultimately rise to profitable levels, the USPS may be able to preclude such entry. Because it has the discretion to interpret the contours of its own statutory monopoly, it can raise entry costs for private firms by defining the scope of competitive services that can be supplied privately.

In addition to monopoly powers, government ownership gives the Postal Service an array of special privileges and implicit subsidies. It is exempt from taxation. Because it can borrow from the Federal Financing Bank, it enjoys an explicit government debt guarantee. Because it is government-owned, it is exempt from paying investors an expected rate of return on their invested capital. The absence of an obligation to pay a competitive return on invested capital lowers the cost of funds that a state-owned enterprise can use to subsidize losses in non-core markets.

USPS is not subject to a bankruptcy constraint. It has, at various times, received direct cash subsidies. It has the power of eminent domain. It is exempt from a host of costly government regulations, including antitrust law and SEC disclosure requirements. It is immune from parking tickets for its vehicles or from paying for vehicle registrations. It does not have to apply for building permits or conform to local zoning regulations, and so on. All of those government-granted benefits are valuable, and allow the USPS to artificially reduce its prices below those of more-efficient rivals.

Finally, the USPS is subject to less binding price regulation than is a typical private firm. The Postal Rate Commission has a limited set of policy instruments at its disposal: It lacks subpoena power, and its powers to set maximum prices for postal services are not unlimited. It can be overruled by the Board of Governors of the USPS.

These are several of the many reasons why the Postal Service, in addition to its enhanced incentives, has greater ability than its private, profit-maximizing counterparts to engage in anticompetitive activities.

Summary and Conclusions

Government-owned firms have strong incentives to engage in anticompetitive activities that serve to expand the scale and scope of their operations. However, they also typically have enhanced ability to engage in anticompetitive activities. I have shown this by reviewing the privileges and immunities enjoyed by the U.S. Postal Service. The USPS has a monopoly in its core service of letter delivery, but also retains a mailbox monopoly. It has also assumed the authority to suspend the delivery monopoly for certain activities. Because it can earn losses over time and remain in business, it does not need to recoup losses in competitive activities to avoid bankruptcy.

The USPS receives a variety of additional government-granted benefits, all of which are valuable, including debt guarantees and exemption from paying taxpayers a rate-of-return on their investment. The USPS thus has both the incentive and the ability to inefficiently compete in activities where it faces competition.

In light of this greater incentive and ability to engage in anticompetitive activities, enhanced scrutiny under antitrust law is appropriate. Furthermore, because a monopoly position in one market may enable the USPS to reduce competition in another market, it is probably wise to construe its statutory monopolies narrowly. Moreover, limits on its ability to expand beyond the market covered by its statutory monopoly are appropriate.

Notes

1. See David E. M. Sappington and J. Gregory Sidak, "Competition Law for State-Owned Enterprises," AEI working paper (2003).

2. George L. Priest, "The History of the Postal Monopoly in the United States," Journal of Law & Economics 18 (1975), p. 79.

3. James C. Miller III, "End the Postal Monopoly," Cato Journal, 5, (1985), p. 150.

4. Case COMP/35.141, Deutsche Post AG, 2001 O.J. (L 125) 27, p.32, note 52. The stand-alone cost of service X is the outlay that would be required for a firm to produce service X and no other service.

5. Organization for Economic Cooperation and Development, Committee on Competition Law and Policy, Promoting Competition in Postal Service (No. 24, DAFEE/CLP [99] 22, October 1, 1999), p. 55.

Rick Geddes is assistant professor in the Department of Policy Analysis and Management at Cornell University and the author of Saving the Mail: How to Solve the Problems of the U.S. Postal Service (AEI Press, 2003). He is a research fellow at the Hoover Institution and an adjunct scholar at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

R. Richard
Geddes
  • Rick Geddes is associate professor in the Department of Policy Analysis and Management at Cornell University. His research fields include private infrastructure investment through public-private partnerships, postal service policy, corporate governance, women's property rights, and antitrust policy. He is a Research Associate at the Mineta Transportation Institute, and a visiting scholar at the American Enterprise Institute. He was a Fulbright Senior Scholar at Australian National University in Canberra in the fall of 2009, and a Visiting Researcher at the Australian Government's Productivity Commission in the spring of 2010. His research focused on Australian public-private partnerships in both positions. Geddes teaches courses at Cornell on corporate governance and the regulation of industry.

    In addition to his teaching and research at Cornell, Geddes served as a commissioner on the National Surface Transportation Policy and Revenue Study Commission, which submitted its report to Congress in January 2008. He has held positions as a senior staff economist on the President's Council of Economic Advisers, Visiting Faculty Fellow at Yale Law School, and National Fellow at the Hoover Institution at Stanford University.

    In 2008, Geddes received the Kappa Omicron Nu/Human Ecology Alumni Association Student Advising Award. His published work has appeared in the American Economic Review, the Journal of Regulatory Economics, the Encyclopedia of Law and Economics, the Journal of Legal Studies, the Journal of Law, Economics, and Organization, the Journal of Law and Economics, the Journal of Law, Economics, and Policy, and Managerial and Decision Economics, among others.

  • Email: [email protected]

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 25
    MON
  • 26
    TUE
  • 27
    WED
  • 28
    THU
  • 29
    FRI
Wednesday, August 27, 2014 | 3:00 p.m. – 4:15 p.m.
Teacher quality 2.0: Toward a new era in education reform

Please join AEI for a conversation among several contributors to the new volume “Teacher Quality 2.0: Toward a New Era in Education Reform” (Harvard Education Press, 2014), edited by Frederick M. Hess and Michael Q. McShane. Panelists will discuss the intersection of teacher-quality policy and innovation, exploring roadblocks and possibilities.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.