Distribution System Failures

Many years ago I spent two years as a Congressional staffer who, among with my other duties, followed the deliberations of the House Appropriations subcommittee dealing with the U.S. Post Office [yes, that long ago]. I tried to get my boss to push for a change in the way the Post Office calculated costs, because from what I figured then, and what I still figure with the U.S. Postal Service, the cost model they used and continue to use undercharges for bulk and pre-sorted mail because it doesn’t take fully into account the need for extra capacity created by lower rates on huge volumes, but priced the costs of bulk mail on the marginal costs. I never had a problem with magazine rates, but I’ve always had a problem with catalogues and advertising or “junk” mail, which has a far greater volume than do magazines. That Postal Service model doesn’t take into account the additional capital and equipment investment required for all that bulk. Now, as a result of current and projected deficits, the Postal Service is recommending that mail deliveries be reduced to five days a week, yet the bulk advertising mail rate is low enough that all too many mail order operations can still afford to send my household multiple copies of their junk rather than clean up their mailing lists. Anytime it’s cheaper to print and send excess copies than to streamline internal mailing lists, the “distribution costs” are too low.

I may be unusual, but I’m more than willing to pay more for a paper copy of the periodicals I value, and if their prices go up, I still pay for them [so far, at least] because the paper copies allow me more efficient time-allocation in a crowded day.

Now… over the past week, it has come to light that Anderson News unilaterally decreed a seven cent a copy surcharge on magazines and books it distributed. Since Anderson serves as the wholesale distributor for something like half the magazines distributed in the United States, as well as half the paperback books that aren’t sold to the bookstore chains directly by the publishers and book wholesalers such as Ingram, this surcharge represents an enormous additional cost to the publishing industry, and some publishing companies, notably Time, Inc., reportedly refused to pay the surcharge. As a result, Anderson “temporarily suspended” its entire distribution business and informed the bulk of those employees that they were on personal or vacation time… if they had any.

While I confess that I don’t know all the details of the Anderson finances, I do know that some twenty years ago, the wholesale magazine and book distribution business imploded from more than 1,000 local and regional distributors into an increasingly consolidated distribution system that now essentially consists of less than a handful of national distributors and leaves most of the country with no effective choice of distributors. This system has also resulted in an increasing restriction of choice for those accounts serviced by the major distributors, while generating a surfeit of waste paper in terms of magazines and paperback books being pulped, rather than being returned.

So, with Anderson, we have a service that, over the years, has gotten more and more centralized, with less and less competition, offers less and less choice, and creates significant wastage because consumers do have less choice. Yet, I’m told by those in the business that the magazine side, which has even more wastage than pulped paperback books, is the most profitable, and that any attempt to create greater choice on the book side is highly resisted.

In the case of both Anderson and the Postal Service, effectively, those who depend on their services are faced with monopolies. In the case of the Postal Service, first class users, no matter what the economists claim [and having been one, I don’t buy their number crunching], pay more than they should while advertising usage pays too little. In the case of Anderson, there’s effectively no alternative.

Economic history has shown, time and time again, that monopolies have serious drawbacks… as these two cases illustrate. So… why are all the banking bailout plans concentrating so much on reducing the number of banks?