South-Western College Publishing - Economics  
The Internet, the Post Office, and FedEx-New Best Buds
Topic Product Markets
Key Words Internet, shipping, US Postal Service, e-commerce
Full Article

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Reference ID: A148946005

News Story Last year, the U.S. Postal Service saw its revenue from first-class mail fall by 1%--most likely the victim of email, fax and other forms of online communication. So why is the USPS embracing the Internet? Because last year its revenue from package delivery rose 2.8%, as it handled over 3 billion packages of items sold over the Internet.

E-commerce sites like Amazon.com and eBay have become the USPS's best friend. UPS and FedEx are also pretty friendly with these sites, which need ways to get their goods from suppliers to purchasers. When those shippers want it done in huge numbers, they call on the shipping experts.

According to researchers, online sales are expected to hit over $132 billion in 2006, and all of those items have to be shipped somewhere. And it's not just the retailers. Netflix, a DVD-rental site, ships 1.4 million DVDs daily via USPS. To improve efficiency, Netflix has located DVD shipping facilities around the country near mail sorting centers.

The synergy developing between shippers and online merchants is altering shippers' services to make merchants' lives easier. The USPS introduced a flat-rate $8.10 box, which is big enough to hold five books - or other goods - for people shipping goods on eBay. And the synergy continues among shippers themselves. FedEx has introduced FedEx SmartPost, in which FedEx has partnered with none other than the USPS. Under this arrangement, FedEx ships the package part of the way, and then hands it off to the USPS for the actual home delivery. That way FedEx can concentrate on the cheaper long-distance shipping.

Questions
Discussion Questions:
1. Why does the creation of FedEx SmartPost increase profits for both FedEx and the USPS?
2. As these synergistic relationships continue, what will happen to consumer and producer surplus?
3. Do you think that this is an indication that the USPS will always be around, even as people argue that it should be disbanded? Why or why not?
Multiple Choice/True False Questions:
1. True/False. While Internet communication and the USPS are substitute goods, the USPS and online merchants can be considered strategic complements.

2. True/False. Demand for USPS shipping is a derived demand, derived from demand for online sales.

3. What is the impact of the creation of FedEx SmartPost on the profitability of the USPS?
  1. Should increase because demand for USPS shipping increases.
  2. Should decrease because FedEx is expanding its reach in the market.
  3. Should increase because FedEx is giving away business.
  4. Should not change at all.
Source Hafner, Katie. "Postal Service Finds a Friend in the Internet." The New York Times. August 2, 2006.
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