In Washington, where strange things are now commonplace, one of the weirdest battles is going on between the president and Amazon.
In short, President Trump has attacked Amazon for supposedly underpaying the U.S. Postal Service (USPS) on its package delivery contract. He has proposed doubling the rate that Amazon pays the USPS. Even if the president is not attacking Amazon and its CEO Jeff Bezos because he owns the Washington Post, as many believe, increasing the rate paid to the Postal Service could wind up hurting, not helping it.
First, let’s get one thing out of the way. Amazon is not the cause of the Postal Service’s massive financial problems. Actually, it is a savior, of sorts, though maybe not as much as some would hope.
The Postal Service has been a financial mess for decades and much of the blame goes to Congress. It requires six-day delivery of the mail to everyone and controls the size of the system. Try to close a post office in rural America and you find out what really matters to the local congressman.
When the USPS management tried to save money by cutting Saturday delivery and downsizing, Congress made sure that the local, often totally inefficient, post offices were kept open and that Saturday delivery was retained.
The result is a mail-delivery system that is incapable of managing its costs, not because its management is incompetent (though, at times, it has been that) but because Congress makes sure that efficient operations defer to political necessities.
In an environment where the need for its major product — mail delivery — is fading rapidly and politicians have veto power over critical decisions, even the greatest manager in the history of business would lose money.
Facing the decline in the use of both first-class and junk mail, the Postal Service entered into a contract with Amazon to deliver packages, including on Sunday. This made total sense.
The USPS has excess capacity that is the result of the need to deliver mail to everyone. By working with Amazon, it could more fully operate its underutilized delivery system.
For the Postal Service, the extra expense of carrying packages is minimal. The infrastructure is already in place, so putting packages on partially empty trucks and dropping them off at homes is not costly. That is true even for Sunday delivery.
And that is where pricing comes in. One of the things you are taught in introductory economics is that you produce a good as long as the additional (what economists call “marginal”) cost is less than or equal to the price you receive. For the Postal Service, the marginal cost was extremely low, so it could afford to deliver a lot of packages at a modest price and still make a ton of money. And it has.
Which brings us to the contract. The Postal Service’s pricing, which is determined by the Postal Regulatory Commission under the Postal Accountability and Enhancement Act (in other words, by law) is not required to cover certain costs, including all wages.
While that might allow the USPS to underprice package delivery, the cost of delivering the extra package is so low that it is still quite profitable. The USPS doesn’t have to hire additional workers, buy more mail trucks, or build more buildings, all of which it already has in excess.
So the question is, can or should the Postal Service charge Amazon more?
That is a business strategy question that cannot be answered easily, even if it prices package delivery below that of its private-sector competitors’ prices.
Charging low prices doesn’t mean you should raise your price.
USPS’ relationship with Amazon helps it limit its operating losses. Raising the prices up to or near UPS, FedEx, or other delivery services would almost certainly lead to a loss of business.
While the higher prices could make up for the loss of business, there could be a downside. Amazon, if facing significantly higher costs from the USPS, could accelerate its plans to develop its own distribution fleet. This would reduce demand significantly, potentially devastating the Postal Service.
By not maximizing profits in the short term, the USPS could be maximizing profits in the long term. The lower prices keep its volume up and limits competition, even from Amazon itself.
The president’s suggestion to significantly raise the USPS price for Amazon to deliver its packages might increase revenues initially. But more than likely, it could ultimately lead to a large loss of business, forcing taxpayers to pay even more to sustain the system.