In a recent filing with the Postal Regulatory Commission (PRC), UPS charged that the U.S. Postal Service unfairly used its government-backed monopoly position on mail delivery to undercut private-market competitors – like UPS and FedEx – by charging artificially low shipping prices to expand its market share in parcel delivery.
“In turn, the larger market share enables the utility to better leverage economies of scale and scope, increasing its scale and further harming its now handicapped rivals,” UPS said in its filing.
The PRC, which granted a price reduction request to the USPS in 2014, in November approved a rate plan with an average increase in shipping costs of 9.5% or about $5.50, effective Jan. 17. The popular Priority Mail service, which guarantees three-day delivery for items weighing less than 70 pounds, will increase by an average of 9.8%, between $6.80 and $18.75 depending on the size of the box. Priority Mail Express, which guarantees overnight delivery seven days per week, will increase 15.6%.
In its filing with the PRC, UPS argues that as a public sector operation, the USPS is not constrained by market forces like investors’ profit demands, and so can seek to expand its reach through anti-competitive pricing even if it operates at a loss.
“In light of today’s economic realities, the Postal Service has a specific incentive to expand its scale by charging prices for competitive products below levels that efficient private competitors can meet,” UPS argued. “This is, in fact, likely the Postal Service’s most realistic option for expanding scale given the falling demand for letter mail since the widespread adoption of email and electronic billing.”
To avoid undue market disruption through anti-competitive practices, Congress has required the USPS to show that pricing on its competitive products – i.e. parcel shipping – is set to at least cover its costs, which the UPS argues it is not doing.
UPS claims that mostly as a result of its pricing strategy, the USPS has been gaining share over FedEx and UPS. A good bit of this business includes Amazon, for which the USPS does Sunday deliveries. Interestingly, Amazon has asked questions challenging UPS’s position on the USPS’s parcel pricing strategy in its own PRC filings.
In its filing, UPS cites PRC Public Representative Richard A. Oliver, who reasoned that the USPS was able to win PRC approval of its 2016 rate increases because the expiring rates were “set too low, despite meeting regulatory standards.”
“Consequently, the Public Representative questions the accuracy of the accepted costing methodology to set a reasonable price floor,” Oliver said. “It seems likely that the accepted methodology does not attribute all appropriate costs to competitive products.”
UPS’ charge that USPS’ pricing was not covering parcel costs as required by the PRC and Congress is “based upon a set of ad hoc, loosely-constructed, cost measures by Dr. Kevin Neels (a consultant with The Brattle Group),” the USPS counters in another filing with the PRC.
The USPS further states that because Neels, who was retained by UPS, “assigns more cost to individual products than their actual incremental costs,” the Postal Service did not underestimate the cost of its competitive parcel delivery product, and thus complied with its regulatory mandate.