Sidak Files Declaration with FTC on Network Advantages Conferred on the U.S. Postal Service by Statutory Monopolies

August 6, 2007

Criterion founder J. Gregory Sidak submitted his declaration on the United States Postal Service to the Federal Trade Commission today. In his declaration, filed at the request of UPS, he comments on network advantages that the U.S. Postal Service derives in competitive markets as a result of its statutory monopolies and other special privileges.

State-owned enterprises (SOEs) such as the Postal Service have stronger incentives than profit-maximizing firms to use their networks to pursue activities that are harmful to competition and consumers, even though SOEs may be less concerned with generating profit. In particular, the Postal Service has heightened incentives to discount costs in the pursuit of an expanded operating scale, particularly when setting prices in competitive markets. In fact, the Postal Service may find it optimal to set prices below marginal costs.

The Postal Service has been granted a unique statutory monopoly, created when Congress chose, through the Private Express Statutes and the mailbox access restrictions, to establish and perpetuate a public enterprise with monopoly power. Owing to this statutory monopoly, the Postal Service enjoys a significant network advantage due to uniquely available economies of scale and scope. This competitive advantage may further encourage and enable the Postal Service to price competitive products below rivals’ costs.

In particular, if significant economies of scope exist in the production of Postal Service products, combined with economies of scale, the Postal Service will be able produce competitive products at a price less than the competitive stand-alone cost. Consequently, the Postal Service will be able to exploit cost complementarities that exist between market-dominant and competitive markets. Moreover, the anticompetitive concerns raised by network advantage are of particular relevance to postal markets: Numerous empirical studies (spanning various time periods, datasets, methodologies, and countries) have concluded that postal operations exhibit significant economies of scope.

Network advantage, as measured by the difference between stand-alone cost and incremental cost, is a useful benchmark for gauging the extent to which Postal Service enjoys an advantage that is unavailable to its competitors. All else equal, the larger this difference is, the greater the benefit the Postal Service enjoys relative to competitive rivals. In the case of the Postal Service, attributable cost can serve as a reliable proxy for incremental cost. Thus, an appropriate proxy for network advantage is simply the difference between stand-alone cost and attributable cost.

To the extent that the Postal Service passes on cost savings derived from network advantage in the form of lower prices for competitive products, consumers of these products will benefit, at least in the short run. Hence, there may exist a tendency for regulators and policymakers to disregard or minimize the consequences of the Postal Service’s network advantage. Therefore, it bears emphasis that lower prices are not always better, particularly if price falls below marginal cost. In addition, low prices for competitive products may come at the expense of higher prices for market-dominant products. Such a pricing structure would effectively penalize the designated beneficiaries of the Postal Service’s core mandate.

Congress chose not to repeal the Postal Service’s statutory monopolies. That decision, however, does not imply that the Postal Service should be given carte blanche to use its resulting network advantage in competitive markets to harm captive consumers and efficient competitors.

To view the supplemental declaration, click here.