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QR Going Postal

Nathan Grawe
published May 30, 2014

It's pretty well known that first-class mail has taken a hit of late. The internet has eliminated the need for much personal correspondence, bill mailing, and periodical delivery. In total, first-class mail pieces are off almost 1/3 in the last 5 years. In large part due to these changes, the post office now faces large deficits.

Recent proposals have suggested radical changes–elimination of mail service on Saturday's and/or Tuesdays. But interestingly, a more traditional solution may be more likely to work today than in the past: postage rate increases. While the regularity and annoyance of postage increases leads many to believe that stamps have seen a dramatic increase in price, in fact the price has more or less tracked inflation over the last 40 years. It may be reasonable to expect to pay more in inflation-adjusted terms given that the lost economies of scale. Estimates of the elasticity of demand–the percent change in quantity due to a one-percent change in price–suggest that the Post Office dales will fall 0.35% for each 1% increase in price. That means revenues will increase 0.65% for a 1% increase in prices.

What's more, this figure has dropped in recent years; we are getting less price sensitive in our mail demand. That makes sense if we suppose that those items which we still send through the mail are harder to replace with online alternatives.

To be sure, postage increases can't entirely fix the Postal Service's financial problems. Their deficit has been on the order of $5 to $15 billion on $66 billion of revenue. But a 10% increase in postage rates might raise over $4 billion.



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