Why Should the Postal Service Deter Amazon's Competitive Entry into Last-Mile Parcel Delivery?

Abstract

In its June 2017 Risk Analysis Research Center (RARC) Report, the Office of Inspector General (OIG) of the U.S. Postal Service asked a world-renowned expert on postal economics, Professor John Panzar, to create a theoretical model of the modern parcel-delivery market. Panzar’s 60-page white paper, appended to the RARC Report, presents in detail a mathematical model of Amazon’s optimal dispatch strategy for last-mile parcel delivery as a function of different rates charged for such delivery by the Postal Service, FedEx, and UPS. Panzar says that his model “reveals conditions under which the rates offered by the [Postal Service, FedEx, and UPS] are low enough to deter [Amazon] from operating its own delivery vans.” As if promoting the creeping expropriation of a private industry, Panzar’s analysis recommends that a state-owned enterprise cut its prices so far as to deter competitive entry by a more efficient and highly innovative private firm. However, Panzar’s stylized mathematical model rests on unreliable economic assumptions and offers no useful information about last-mile parcel delivery in the real world. His static model fails to account for Amazon’s broader strategic goals, such as those motivating its acquisition of Whole Foods in August 2017. Panzar’s normative conclusions emphasize benefits to the Postal Service and unsolicited benefits to Amazon (as well as UPS and FedEx) but neglect potential harm to consumers of postal products. Moreover, his recommendation that the Postal Service deter Amazon’s entry into last-mile delivery would exceed the powers that Congress delegated to the Postal Service. If implemented, that recommendation would potentially violate antitrust law. In short, Panzar’s analysis is not a reliable or useful guide for either the Postal Service’s managerial decisions or its regulatory oversight.