Assessing USA Postal Ratemaking: An Application of Ramsey Prices

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In early rate cases the inverse elasticity rule was used explicitly in setting postal rates, but more recently the USA Postal Service has eschewed its use. Since cross elasticities between mail classes are not all zero, general Ramsey prices would be more appropriate than the simple inverse elasticity rule. Using USPS estimates of revenues, costs, and elasticities, postal rates are simulated under several different conditions. The simulated prices are then compared to the rates suggested in the 1980 rate case to determine whether the principles being followed by the USPS lead to Ramsey prices.