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You’re Right, The American Prospect Doesn’t Understand Business

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That headline encompasses a certain difficulty for should I really have put ….business at the end there? Or should it have been ….economics? Or possibly …logic, or numbers, or what the heck, just the all encompassing and probably true, the American Prospect doesn’t understand?

They’re discussing the idea that the US Post Office subsidises Amazon. The thought being that Amazon does indeed use USPS to deliver some portion of packages and perhaps that’s not entirely a free and open market price. Possibly there’s some favouritism there. Or perhaps those delivery services are being underpriced?

It’s a useful thing to muse upon but the thinking is then undone by this:

It could be as much as four times the price for Amazon to deliver a rural package than a suburban or urban one. That’s the level of the subsidy, on a fraction of total packages delivered.

USPS charging Amazon less than it would cost Amazon to do the same thing does not make it a subsidy. Consider the absurdity of the logic using another example.

I get paid $20 an hour – just to take a number from somewhere. Walmart will sell me a cabbage for $2. It would cost me $10 to grow my own cabbage. If my time is worth $20 an hour that’s not far off reality. Add in the price of some land, seed, biogrow and my time weeding, digging and hoeing and we might well get to that sort of level.

So, is Walmart subsidising me to the tune of $8 for each cabbage? No, no, Bentonville is not.

Then start to think a little more about business. The USPS has large fixed costs. It must, by law, delivery to some certain number of addresses every day. It’s not every house and subdivision in the country, they don’t agree to deliver to every shack in the mountains. But they do have to deliver to a known and numbered group of places.

The marginal costs for the USPS of delivering an extra package are low. Because they already cover most of the costs of any one delivery in those fixed costs. As long as the revenues from delivery of any one package cover those marginal costs of that delivery then it’s rational for USPS to take the contract to do so. It is, after all, a contribution to gross profit, a contribuition to those fixed costs.

This is how many industries work. The fixed costs of running an airline are high, the marginal costs of an extra passenger spit. We do not say that the passenger charged something above marginal cost and below full cost is being subsidised. Well, OK, we can, but we generally don’t.

But they’ve gone well beyond that in their misunderstanding. They’re saying that USPS charging less than it would cost Amazon itself is a subsidy. Which is insane. That’s like saying the airline is providing a subsidy when it charges less than the cost of my driving the distance. Even if the ‘plane ticket covers, entirely, all the fixed and marginal costs of that flight, a useful and relevant contribution to all of the associated overheads, then it is still a subsidy if the ticket is cheaper than the alternative method of doing so.

That really is insane. For it really is insisting that Walmart subsidises me every time I buy anything at all from it – for it’s always cheaper than doing or making that thing myself.

So, yes, The American Prospect doesn’t understand…..

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