Hoover Digest

Neither Snow nor Sleet . . . Can Dampen This Monopoly

Sunday, April 30, 2000

Which U.S. multinational corporation had more than $60 billion in revenues last year, sold almost 200 billion units of its product, employed more than 900,000 people, and yet retains an absolute, ruthlessly enforced monopoly in its core business? Microsoft? GM? Intel? None of the above. It's the United States Postal Service.

Illustration by Taylor Jones for the Hoover Digest.

Despite "corporatization" in 1970, the postal monopoly still extends to delivery of anything considered a "letter," which the USPS conveniently is permitted to define. Naturally, the USPS prefers an expansive definition. The majority of its revenues continue to come from monopolized activities. In 1998, 58 percent were derived from monopolized first-class mail, while 24 percent came from partially monopolized Standard Mail A (formerly third-class mail). Yet there are no longer any solid economic reasons for this legally enforced monopoly. The original justifications for the monopoly are now irrelevant, and technology is rapidly changing the nature of communications so as to make competition more important.

Government enforcement of the postal monopoly predates the formation of the United States. British colonial authorities in America imposed a postal monopoly so that insurgent colonists communicating treasonous plans would either have to pay for an expensive private messenger or risk capture in using the royal mail. The Continental Congress continued government involvement for reasons of national security but also to ensure dependable communications generally. Congress undertook management of the post because private alternatives were then inadequate.

As early as the 1790s, however, U.S. government intervention became oriented toward preserving a politically motivated cross-subsidy from the populous middle states to the relatively sparse west and south. Rural citizens received newspapers and other information at low cost, which furthered federalist aims to preserve and bolster the Union. George Washington was one of the first to appreciate the political benefits arising from a monopolized post. The traditional justification for government control thus developed quite early: subsidizing outlying routes with excess revenues from routes in densely populated areas.

The government-enforced postal monopoly predates the formation of the United States. It's time to end it.

By the time of the 1845 congressional debates on the postal monopoly—the most extensive ever conducted—private express services were widespread. Members of Congress argued that the private expresses would never provide service to sparsely populated areas and that the government would consequently be left with unprofitable rural routes and massive losses. Thus, the main justification given in 1845 for legally restricting the carriage of letters by the private expresses was again to preserve the implicit subsidy to rural routes.

This argument against competition would be used for the next 150 years. In 1973 the Board of Governors of the newly reorganized Postal Service stated:

If the Private Express Statutes were repealed, private enterprise, unlike the Postal Service, would be free to move into the most economically attractive markets while avoiding markets that are less attractive from a business standpoint. . . . Without abandoning the policy of self-sufficiency and reintroducing massive subsidies, it is hard to see how the Postal Service could meet rate and service objectives in the face of cream-skimming competition against its major product.

The Postal Service continues to invoke the "cream-skimming" argument today. Ensuring rural service, referred to by the USPS as "universal service" (no one disputes that urban areas would always receive service), has certainly been the most durable argument for retaining an enforced monopoly. Former postmaster general Marvin Runyon rearticulated the link between monopoly power and universal service in 1996 when he stated that the "Private Express Statutes provide the financial underpinning that allows the Postal Service to provide universal mail delivery at a uniform postage rate for letter mail."

The rural delivery argument for monopoly power has dubious economic and social underpinnings. There are at least four reasons for this.

The Postal Service has been using the same arguments to justify its monopoly for 150 years. The arguments no longer wash.

First, basic economics implies that rural customers are unlikely to be without service under competition; they would simply have to pay the true cost of delivery to them, which may or may not be lower than under monopoly. There are a substantial number of alternative delivery services—including United Parcel Service, Federal Express, and newspaper and circular deliveries—that frequently cover these same routes, so substantial competition would arise to meet rural demand. Moreover, studies of deregulation of similar "network" industries in the 1970s and early 1980s indicate that savings to consumers are so great that even rural customers would enjoy lower rates under competition. For example, estimates of the effects of deregulation of natural gas show that prices, in real terms, fell between 27 and 57 percent, depending on the class of consumer; airline tickets fell 29 percent; trucking rates between 28 and 58 percent; railroad rates 44 percent; and so on. Researchers also found that real price reductions increased over time, suggesting that long-term adjustments to competition are important. There is no reason to believe that competition in postal services would not yield similar benefits to consumers. Postal delivery is structurally quite similar to trucking, which displayed some of the largest price reductions from deregulation.

Firms adjust to competition in a wide variety of ways. Recent studies show that deregulation in the United States has caused firms to make innovations in marketing, to introduce new products and services, to make improvements in operations, to strengthen corporate governance, to improve service quality, to be more responsive to customers' desires, and to offer a broader array of price-service combinations. Such improvements to the postal industry would be music to the ears of many a customer.

Second, basic notions of fairness imply that the cross-subsidy should be eliminated. To the extent that people make choices about where they live, they should assume the costs of that decision. If I decide to drive my car longer distances, why should someone else subsidize my increased use of gasoline? Additionally, it is quite possible that the urban-rural subsidy results in wealth redistribution from poor to rich. Currently, for example, inhabitants of the South Bronx are among those who subsidize mail delivery to Aspen, Colorado.

Monopolies are always the most damaging when they are established in collaboration with government. This magnifies the concentration of power, eliminates any hope of new competition, and stifles innovation.

Third, there is no reason why the government monopoly is necessary to ensure service to sparsely populated areas. The government could easily award competitive contracts to private firms for that service. As Harvard economist Andrei Shleifer writes, "The government can always bind private companies that compete for a mail delivery concession to go wherever the government wants, or it can alternatively regulate these companies when entry is free. It cannot be so difficult to write the appropriate contract or regulation; after all, the government now tells the U.S. Postal Service where it wants the mail to be delivered." If rural delivery is indeed an important social concern, it can easily be addressed through contracting.

Fourth, early concerns that rural residents of the United States would somehow become isolated without federally subsidized mail delivery today are simply unfounded. The explosion in new communications technologies since 1790, and their rapidly falling price, ensures that no one is cut off from the larger society unless that is their desire. One obvious alternative that may be more useful than a letter in preventing isolation is a phone call. Recent estimates show that long-distance telephone rates fell between 40 and 47 percent from 1984 to 1994, increasing the viability of this option. Another option is the facsimile, which is a close alternative to letter delivery in that a written message can be transmitted instantaneously at very low cost. Although both sender and receiver must have access to a fax machine to complete such a communication, numerous businesses are now willing to provide this service, and inexpensive fax machines are now widely available. Electronic mail allows written messages to be transmitted instantaneously. Once both sender and receiver have access to a computer, the marginal cost of sending an electronic message is close to zero.


It is a mistake, however, to believe that the availability of substitutes implies that the postal monopoly no longer imposes costs on society. Many important items, such as financial statements and wedding invitations, continue to be sent through the mails. The prices that customers currently pay for delivery of these items reflect the substantial costs of a legally enforced monopoly. Perhaps because of this, other countries have weakened their postal monopolies and some will soon be eliminated. New Zealand, Sweden, Finland, and Germany have all committed to completely abolish their postal monopolies by 2002. Many countries have introduced greater competition by allowing firms to compete with the government as long as they charge no less than some multiple of the government's price, which allows a gradual phase-in of competition. For example, Australia's monopoly is limited to four times the government's stamp price and may be reduced to the stamp price itself. Canada's monopoly is three times the stamp price. The European Union has limited all European postal monopolies to five times the stamp price. Since 1992, CityMail, a private postal carrier in Sweden, has successfully competed directly with the government in Stockholm. CityMail now delivers to 1.2 million households in Sweden's largest metropolitan areas, reaching about 30 percent of the population.

But perhaps most important, researchers have found that firms facing competition more rapidly utilize new technology. This finding is particularly important given the numerous applications of computer technology to the delivery business. Optical character recognition facilitates the computerized bar coding of mail, which allows the processing of mail with little human involvement. Computers are becoming better at recognizing both handwritten and typed addresses. Although the Postal Service is using some of this technology in its sorting operations, competition would facilitate a great deal more. Clifford Winston of the Brookings Institution states that "when regulatory restrictions on pricing, operations, and entry (especially from new firms) have been enforced for decades, managers and employees of regulated firms settle into patterns of inefficient production and missed opportunities for technological advance and entry into new markets." Given the pace of technological change in computerization and robotics, delivery costs for letters would fall dramatically under competition because currently available technology would be more fully utilized.

Competition would also allow firms to specialize in the delivery of certain types of mail. Some firms may be good at delivery of time-sensitive mail, others at bar-coded or hand-addressed mail. By having many different types of delivery services bundled into one firm, as under the current system, these economies are lost.


Throughout history monopoly has always been most damaging when it was established in collaboration with government. This magnifies the concentration of power, eliminates any hope of new competition, and stifles innovation. There are no economically sound reasons why the government should continue to use its power to defend the postal monopoly. Let me therefore suggest a modest proposal: Allow any private firm to compete with the Postal Service as long as it charges no less than the stamp price. Because consumers could continue to use the USPS at the stamp price, this would ensure that no consumer is injured by demonopolization. Consumers would therefore have the same options they do now. This would allow specialized markets to develop in various areas of postal delivery and allow some of the benefits of competition to be reaped.

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