Friday, May 05, 2006

Postal insurance

[From Marginal Revolution] Today there is a store the the US Post Office is considering launching a stamp which can use to post a letter at any time in the future. This will hold even if, as is inevitable, stamp prices should rise. What this means is that you could confidently buy the stamps and not have to worry about having to put annoying little adjustments on when the price rises. There would be no reason not to stock up now. Moreover, the stamp would be priced at the same price as current first-class stamps.

How will this change the USPO's pricing behaviour? Before, when they put up postage prices, there would be an 'inframarginal effect' that spread over all postal customers: that is, the price of postage would rise to existing users and so most of them would end up paying more. Now, when the USPO puts up postage prices, there will be a large number of customers who are unaffected. This reduces the profits the USPO will make from putting up prices as they still suffer all of the costs of this as marginal customers turn away. So postage prices will rise more slowly than they have in the past.

Of course, this assumes that the type of customer who buys the fixed price stamp in bulk has the same willingness to pay for stamps as those who do not. This may not be the case. The fixed-price stamp offers two things: (i) more convenience for those who buy stamps in bulk for convenience; and (ii) insurance against future prices rises; also more valued by bulk purchasers. However, those bulk purchasers have alot of mail to send and likely are thinking more about that then 'emergency' letters that have high value but are not sent very often. In this case, the future marginal consumer will have a higher willingness to pay for stamps as compared to today. So things could flip and the USPO may be tempted to increase future stamp prices more rapidly.

While fun to theorise about, I suspect that with the post office under attack from electronic substitutes these days, they are constrained as it is and will want to think of products that simply make life more convenient. That is, they want to give people less reason rather than more to go to the post office.

2 comments:

Josh Parris said...

alot is not a word. Try "a lot".

David Jeffery said...

I would have thought it's primarily a convenience thing (and perhaps a bit of a marketing gimmick) as it's pretty annoying when the prices change and you have to get 1 and 2 cent stamps to get cover the 3 cent price rise.

I'd imagine that bulk senders use franking machines rather than stamps anyway and there are better ways to hedge inflation than buy lots of price-rise-proof stamps.