February 13, 2010

As we explain in our comments on the Postal Regulatory Commission to allow surcharges of 17 percent to 29 percent over inflation for five years, even the contemplation of such rate increases beyond any previous experience is likely to prompt mailers to make strategic decisions to leave the mail:

The Postal Service elasticity estimates likely, therefore, understate elasticity under the scenarios the Commission’s proposal would allow.  Dr. Neels and Dr. Powers explain that “as prices move outside the range over which the data are calibrated, the estimated elasticity parameters are necessarily less reliable.” Brattle Decl. at ¶ 43.  Generally speaking, larger price increases will make demand increasingly price-elastic because “they present erstwhile consumers of the good or service in question with increasingly large incentives to search for and find acceptable substitutes.” Id. at ¶ 44.  In the postal context, this dynamic means that mailers with the ability to do so may be more likely to leave the mail entirely in favor of digital alternatives.  The growth and importance of digital technology itself may also increase the price sensitivity of mailers. Brattle Decl. at ¶ 45.  In light of these factors, and when faced with the prospect of rate increases of this size, mailers may not wait to see what the Postal Service does with its increased rate authority (i.e., whether it uses all of its authority in each year).  Instead, they may alter their business models to take advantage of other modes of communication and may not return to the Postal Service even if the prospective price increases fail to materialize. Brattle Decl. at ¶ 46; see also O’Sullivan Decl. ¶ 6 (“once we make this conversion, we will not be able to return to our previous mail volume levels.”).

We finish our comments with this:

After it reviews and considers the voluminous public comments that will be submitted in response to Order No. 5337, the Commission should withdraw the Order. Its proposals are illegal. Even if they were legal, they’d be unworkable. As a matter of good public policy and common sense, it cannot be that the solution to declining volumes and uncontrolled costs is to design a system that will drive volumes further down while substantially reducing the incentivize for cost-cutting. The Commission should not gamble the outlook of our postal system on the unproven and suspect hypothesis that large, stand-alone price surcharges will lead to a stable, bright future. These new proposed rules are not what mailers want, not what the Postal Service needs, and not what the Commission can legally or rationally implement.

We will file robust reply comments at the PRC on March 4.