Question

Can the U.S. Postal Service be considered a monopoly in first-class mail? Why or why not?

Explain the barriers to entry in this market.

What has happened to the price elasticity of demand for first-class mail in recent years?

What situations in this market create price discrimination?

Below is the reference text:

The Mail Monopoly

The U.S. Post Office was granted a monopoly in 1775 and has operated under federal

protection ever since. In 1971, Congress converted the Post Office Department into a

semi-independent agency called the U.S. Postal Service, or USPS, which had total

revenue of about $70 billion in 2009. Because of the national recession, revenue in 2009

was down 9 percent from 2008 and about the same as in 2006. More than 650,000

employees at 37,000 post offices deliver an average of 177 billion pieces of mail a year to

144 million home and business addresses. This amounts to about 40 percent of the

world’s total mail delivery. USPS pays no taxes and is exempt from local zoning laws. It

has a legal monopoly in delivering regular, first-class letters and has the exclusive right to

use the space inside your mailbox. Other delivery services such as FedEx or UPS cannot

deliver to mail boxes or post office boxes.

The USPS monopoly has suffered in recent years because of rising costs and growing

competition from new technologies. The price of a first-class stamp climbed from 6 cents

in 1970 to 44 cents by 2010—a growth rate twice that of inflation. Long-distancephone

service, one possible substitute for first-class mail, is much cheaper today than in 1970.

New technologies such as email, ecards, online bill-payment, text messaging, and socialnetworking

sites also displace USPS delivery services (email messages now greatly

outnumber first-class letters). Because its monopoly applies only to regular first-class

mail, USPS has lost chunks of other business to private firms offering lower rates and

better service. The United Parcel Service (UPS), for example, is more mechanized and

more containerized than the USPS and thus has lower costs and less breakage. The USPS

has tried to emulate UPS but with only limited success. After Hurricane Katrina, it took

seven months to reopen the USPS processing and distribution center in New Orleans.

Rivals UPS, FedEx, and DHL all restored service within three weeks.

When the Postal Service raised third-class (“junk” mail) rates, businesses substituted

other forms of advertising, including cable TV, telemarketing, and the Internet. UPS and

other rivals now account for most ground-shipped packages. Even USPS’s first-class

monopoly is being threatened, because FedEx and others have captured 90 percent of the

overnight mail business. Thus, USPS is losing business because of competition from

overnight mail and from new technologies.

USPS has been fighting back, trying to leverage its monopoly power while increasing

efficiency. On the electronic front, USPS tried to offer online postage purchases, online

bill-paying service, and online document transmission service. But these new products

were scrapped as failures. Changing technology and competition have been eroding

USPS’s government-granted monopoly. USPS lost about $4 billion in 2009 and said that

without drastic changes, losses would total $238 billion over the next decade. Even a

legal monopoly can lose money. Proposed changes include postage increases and

dropping Saturday delivery.

Sources: Corey Dade, “Post Office Renews Campaign to End Saturday Mail Service,”

Wall Street Journal, 3 March 2010; Liz Robbins, “Postal Service Revives Cutback

Plans,” New York Times, 2 March 2010; “The Trap: The Curse of Long-term

Unemployment Will Bedevil the Economy,” The Economist, 14 January 2010; and the

USPS home page at http://www.usps.com.