Stochastic Models of Postal Service Pricing

Abstract

In Chapter 3, we showed how peak-load pricing problems in postal service differed from the traditonal peak-load pricing models in the public utility economics literature. In this chapter, we extend the analysis to problems of stochastic demand. While the inclusion of stochasic demand considerations complicates the analysis significantly, the subject is of considerable practical interest in postal service. Postal services have to decide not only how to differentiate services according to speed of delivery but also how reliably to offer the service. If a postal authority offers next day delivery but only delivers on average 50 percent of the mail the next day, it will almost certainly have problems with its customers over the reliability of its service. Alternatively, if it attempted to deliver 100 percent of the mail the next day this would result in too high a price to pay for the service! Thus, not only service standards but also the reliability of meeting these standards are important. Modeling these is rather complex, but the results for optimal reliability and pricing are fairly intuitive.