February 8, 2017 (RARC-WP-17-003)

  • Recently stakeholders have expressed an interest in understanding how other major posts’ prices are regulated and how posts manage the relationship between price regulation, profitability, and service.
  • The OIG worked with WIK-Consult to provide research on how postal prices are regulated in five other countries.
  • We found that in all of the five countries, price regulation has recently become more flexible in two ways – through a reduction of scope of products that fall under price regulation or allowance of higher price increases on regulated products. 

The current price regulation for the U.S. Postal Service’s market dominant products includes a price cap based on the Consumer Price Index (CPI). Previous work by the U.S. Postal Service Office of Inspector General (OIG) has shown that the existing price cap is unsustainable in the current environment of declining First-Class Mail volume. The OIG asked WIK-Consult (WIK), a consulting firm with expertise in international postal regulation, to provide research on how postal prices are regulated in five countries: Australia, Canada, France, Germany, and the United Kingdom. The OIG notes several key findings from this report.

  • Price regulation in these countries has not been static. In all of the five examined countries, the regulators revisited and modified price regulation to allow for greater pricing flexibility in response to changing market conditions. Changes occurred in two ways — reduction in the scope of products covered by regulation and allowance of higher price increases on regulated products. Most recently, the changes have allowed price increases that are greater than inflation.
  • It appears that the combination of higher prices, efficiency gains from modernization, and growing parcel volumes have helped to stabilize the posts’ respective financial positions.
  • In general, service has remained stable or declined slightly, but it is unclear what is driving this result. Price increases may have allowed the posts sufficient revenue to maintain service. However, it is also possible that service performance has been driven by better enforcement mechanisms or more achievable service goals.

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  • anon

    Pricing flexibility would give the Postal Service the ability to adapt and align better with changing markets and the ability to recoup its costs for market-dominant products. Some commercial mailers do not support pricing flexibility under the hypothesis that any increase in price results in massive decrease in mailings. The Postal Service stated that any price increase would consider the impact on current commercial mailers and it is not their intent to “price mailers out of the market”. All five countries in the WIK report were able to increase their prices above the rate of inflation. Interesting to note that in the U.S., market dominant products account for 97% of the total mail volume. The inflation based price cap sounded like a good idea in 2006, but it proved to be more like a flat tire for USPS. According to the WIK report, Germany’s latest price cap regulation allowed for an increase of 5.8% + inflation, while France permitted 3.5% + inflation. PAEA set the price cap plan re-evaluation after ten years, too long – in my opinion. A four to five years interval would be more adequate and can make necessary adjustments if needed.

    Feb 10, 2017

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Contributors

  • Jennifer Bradley, Jeff Colvin, and Laraine Balk Hope contributed to this report.

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