Postal Service Pricing Policies after PAEA

The Postal Accountability and Enhancement Act of 2006 (PAEA) fundamentally altered the U.S. Postal Service by introducing enhanced pricing flexibility, profit incentives, and potential antitrust liability. PAEA also mandated a change from breakeven, cost-of-service regulation where revenues must equal costs over time to price cap regulation. The Postal Service can now introduce new or modify existing prices for market-dominant products as long as the price increase does not exceed the growth in the consumer price index. The combination of pricing flexibility and profit retention is a hallmark of PAEA, and it ushered in a new landscape of economic incentives facing the Postal Service. The consequences and impact of these incentives remain to be seen; hence, the United States Postal Service, Office of Inspector General (OIG) retained John C. Panzar, Ph.D., to perform foundational research on the economic incentives facing the Postal Service. 1 The research offered key insights to understanding Postal Service pricing and marketing initiatives under price cap regulation, and discussed potential antitrust implications. Dr. Panzar documented his research in the attached report entitled " Postal Service Pricing Policies after PAEA. " The research analyzed pricing initiative implications for market dominant products under price cap regulation and offered the following findings in three areas – worksharing discounts, quantity discounts, and channel-based discounts. 1. Worksharing Discounts – the Postal Service faces a strong economic incentive to set worksharing discounts below the costs those activities avoid. Although permissible under PAEA, this would break with long-standing efficiency arguments and invite antitrust scrutiny because it would exclude more efficient providers of worksharing activities. Setting worksharing discounts below the costs avoided would also be controversial because most mail is workshared. ii 2. Quantity Discounts – these types of discounts have an important role under PAEA. There are generally two applicable areas – one where customers do not compete with each other and their demand for postal products is independent and one where customers are competitors with each other and their demand for postal products is interdependent. a. Independent demands – a classic " win-win " situation, the Postal Service and those customers offered quantity discounts are better off while other customers are no worse off. Notably, the price cap automatically protects other customers, so there is no need for heavy regulation. Although there are likely finite opportunities, the Postal Service faces a strong incentive to enter into as many independent demand quantity discounts as …