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12/11/96

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Are postage stamps going the way of the horse and buggy?

Sending holiday greetings through the U.S. mail remains popular, but throughout the rest of the year consumers with home computers are finding ways to bypass the Postal Service, a new Stanford study concludes. The trend for households to substitute electronic communication for stamps has potentially dire consequences for the Postal Service, which habitually covers its rising costs by increasing prices, says Stanford economist Frank Wolak, author of the study.

In the past, people muttered when postage rates went up, but they continued to stick stamps on letters, cards and bills because they had few attractive alternatives.

That began to change in January 1995 when the price of a stamp for a one-ounce, first-class letter increased by about 10 percent from 29 cents to 32 cents, Wolak says. His statistical analysis shows that an increasing number of households balked at the price hike, and those who balked most were those with computers.

With more than one-quarter of households owning a computer by 1995, the postal service faced a new economic situation, Wolak says ­ what economists call an elastic demand for their product. An elastic demand for a product means that an increase in its price prompts consumers to spend fewer dollars on the product. In contrast, an inelastic demand means a price increase results in consumers spending more.

Wolak calculates that the last 10 percent rate increase cost the postal service 1.3 percent in revenue from households.

"The bad news for the Postal Service is that at least the household sector is sufficiently price responsive now that the Postal Service is not going to get increased revenue from households if it increases the price of postage," Wolak says. "As for the business sector, all I can say is that the evidence is that businesses are more price inelastic because there still are very few ways to reach every household with a bill or advertising circular."

In the 1980s, commentators on the electronic revolution predicted that people eventually would replace mail with fax, voice mail and electronic mail. Those technologies were then joining long-distance telephone calling as alternatives for communication across space. So far, however, the Postal Service's volume in number of pieces of mail delivered has continued to grow.

The agency reported a drop, however, of .02 percent between 1993 and 1994 in the number of single first-class pieces it handled ­ as opposed to the first-class pieces that are pre-sorted mostly by businesses. That data prompted Wolak to search available consumer surveys to see if he could spot a reason and predict future trends.

Electronic substitution is here

"I would argue that electronic substitution is now here, and it's having two effects on the Postal Service," he said on a recent day while the computer on his desk collected e-mail messages and the phone a few feet away recorded voice mail messages. His paper mailbox, stuffed once a day, is down the hall. The two effects on the Postal Service are "lowering the level of demand for postal services as well as increasing the price responsiveness of consumers to price increases, because now people have ready substitutes if you do increase the price."

Wolak's own household will be among those posting traditional Christmas cards this year. "I have to send Christmas cards because some of my friends and family are unable to receive e-mail," he said. "I posted photographs of my children on my homepage, but even the lure of frequently changing pictures of their grandchildren couldn't convince my parents to use a computer."

Substitution of new technologies for old may take longer in communications than in some other fields, he said, because people with the latest gadget can't use it until the people they need to reach are also on the cutting edge. Most of Wolak's friends and coworkers are now reachable by either electronic mail, faxes or messages left on voice mail, he says.

Of course, not all usage of these devices takes away from postage. "I send tons more messages to people than I used to just because e-mail exists. It's very simple now to type and send a message," Wolak said.

The fraction of households owning personal computers grew from 7 percent in 1988 to 25 percent in 1994. As subscribership to online services and access to the Internet became more widespread in the 1990s, Wolak said, he found that an increased probability of computer ownership tracked closely with reduced postage purchases. Between 1986 and 1994, he also estimates that the fraction of Postal Service revenues from U.S. households fell from about 20 percent to 10 percent.

Natural monopoly

For most of its existence, people have regarded the Postal Service as a natural monopoly ­ a case of a product or service that could be provided more cheaply by one supplier than by many. But natural monopolies may be a figment of our limited imaginations, Wolak says. He studies their purported existence in such infrastructure industries as telecommunications and electricity, water and postal delivery.

Industries that have been labeled natural monopolies are usually those that require networks, he said. "Once a huge network is installed, the incremental cost of connecting another person to the network is cheap, relative to someone else's cost of going out and building a whole new network to connect that new customer to everyone else."

In the case of the Postal Service, the network is the nation's roads, which are more accessible to competitors, say, than the network owned by an electric utility for distributing electrons or that owned by the telephone company for moving voice signals. Businesses such as United Parcel Service already have demonstrated they can use the roads to deliver packages efficiently, Wolak said, and at a time when the federal government is moving to deregulate telecommunications, "it is more difficult to justify the government maintaining the sole right to put mail in people's mailboxes."

"I don't see any reason why the Postal Service needs to continue to exist in its current form," he said, "but the difficult part of changing it will be that we have tons of cross-subsidies in the system." The poundage rates are national, he explained, so that people in remote locations can have their food and tires delivered by the Postal Service more cheaply than any other way, while customers posting to populated places help pick up the tab.

A universal postal delivery service is probably necessary for the foreseeable future, Wolak said, but service to remote areas might be provided more efficiently through a private competition scheme similar to one proposed for telecommunications. Competing providers would bid for the service and the contract would go to whoever agreed to deliver the service for the least amount of subsidy.

If future price increases cause a drop in total revenue because growing numbers of price-elastic customers switch to other forms of communication, the remaining customers ­ or the taxpayers ­ will be stuck with even higher costs, he said.

"The household sector is not growing, and so the business sector better continue to grow very fast. Fortunately for the USPS, they offer businesses a really cheap way to contact lots of people by direct mail, and it may have to increase the price of this service," he said.

Wolak doesn't expect to see overnight changes in the post office, but he notes that the most recent postmaster general, Marvin Runyan, has implemented many changes designed to make the Postal Servicea more viable competitor. Congress is currently considering a postal reform law that would give the service more freedom in setting prices for its services that face effective competition.

"Each day more people are connecting to the Internet and paying their bills electronically," Wolak concludes, "so steps must be taken now to ensure that the USPS is viable well into the 21st century."

Wolak's study of household demand for postal services is available for $5 from the Stanford Center for Economic Policy Research (publication No. 464). Internet users with the capability of printing encapsulated PostScript documents can print a copy (as well as see a picture of Wolak's children) by first navigating to Wolak's Web homepage ­
http://www.stanford.edu/~wolak

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-By Kathleen O'Toole-


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