on the "forever stamp"
A lot of bloggers seem to be commenting on the "forever stamp" concept introduced today, with responses ranging from "dumbass idea- fire the intern" to...well, I'm not sure quite what this guy actually said, but he sounded smart.

I think it'd be a benefit to the average consumer, but there are a lot of factors to consider from an econ standpoint which make this a much more complex issue than most of the media make it out to be.

First, to keep things as simple as possible, I'll make the assumption that the USPS would not impose (and would do its best to prevent) limitations in availability to minimize supply and demand effects and prevent a secondary or gray market from arising. Note that even absent limitations in supply, such a market may still arise depending on market conditions in the future...

Here's the biggest thing the USPS needs do to do make sure this isn't a failure:

Resale of these stamps would need to have limitations imposed on it in some way. The most obvious arbitrage opportunity would be buying stamps in bulk, then reselling them in the future when they've increased in value. This arbitrage would primarily be at the USPS's expense, indirectly, in effect discounting their actual received revenue per stamp by a small percentage.

If we use the example of 42c versus the current 39c rate (if I read the article correctly, they'll initially be introduced at 42c so this isn't entirely applicable), that's a 7.7% difference. Not huge, but by investment terms, that's higher than the current return on government bonds and most CDs on the market today. But it is huge if you're talking about the USPS revenues, which the article quotes at $69 billion - 7.7% of which comes to $5.3 billion.

But that's only an accurate long-term comparison, where stamp owners would in effect be earning interest on these items. It's another matter entirely if the USPS schedules a yearly rate hike, enabling arbitrageurs to make their 7.7% over the short term, buying right before the rate hike and selling immediately thereafter.

So, to counter this, I'm imagining the following:
1. USPS increases the frequency of their rate hikes. Once a year seems reasonable enough; I see these stamps obsoleting standard first class stamps for the most part, so this shouldn't place excessive strain on consumers or small businesses. The primary reason for this is to minimize the amount of increase for any particular rate hike, simultaneously miniming arbitrage opportunity.

2. Stop selling "forever stamps" to resellers at the existing rate some time before a new rate goes into effect. I'm thinking something like three months - this will help to minimize the short-term arbitrage I mentioned earlier. It'll still exist; once the existing rate is no longer available for sale, the grey market will dictate a new interest-adjusted value for the old stamps.

In this particular scenario, using three months as an example timeframe, 5% as current interest rate, and assuming the same increase of 39c to 42c, we'd probably see something like the following on the grey market:

Cost 4 months before rate change: 39c
Cost 3 months before rate change, immediately after old rate no longer available: 41.475c
Cost 2 months before rate change: 41.65c
1 month before rate change: 41.825c
etc.

My math is probably off here - it's been a while since I had to do interest calculations like this - but you get the general idea.

Two things of note in this example:
First, the immediate change from 39c to 41.475c is still a significant arbitrage opportunity. I suspect it'll be difficult if not impossible to eliminate (or even minimize) arbitrage between the two price points. Second, this is overstated; 7.7% is much higher than the likely actual yearly rate increase - estimated at 2-3%, or equivalent to the rate of inflation (barring unusual price changes in sectors that disproportionately affect the shipping industry i.e. fuel costs). Which brings me to my next point.

3. Rate hikes need to remain below interest rates. This isn't entirely controllable by the USPS, but they have a certain amount of flexibility to minimize the impact of that sort of thing by underpricing their services for the short-term (a year or two, I'm assuming). Again, this is intended to minimize long-term arbitrage; if a more accessible investment yields a higher return there's no incentive to choose the lower return (though there are other factors that may come into effect here, one - liquidity - does not seem to be an advantage if one has thousands of dollars in stamps).

4. The final thing the USPS would need to do is combat the grey market - for example, prohibiting bulk purchasers from reselling to anyone except the consumer, either via law or penalties to bulk buyers found abusing the system.


One final note here. All of my thoughs depend on one assumption - that there is minimal cost associated with acquisition and storage of stamps in volume - a bank for stamps, as it were, which we may see come into existence if the USPS does not take adequate steps to prevent arbitrage.


Anyway - enough geeking out for today. I'll probably have some more records to review for my next post or something.



"I don't rap for free, I'm a capitalist" - Jemini
- posted by vcmc @  5/04/2006 01:26:00 PM