Hedging against postage rate increases
Landry, Steven P.
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Canada Post issued the first permanent stamp on 16th November, 2006. The United States Postal Service soon followed by introducing the forever stamp on 12th April, 2007. The stamps were developed to ease the transition associated with increases in postal rates. The stamp price equals the one-ounce cost of first-class postage at the time of purchase. The stamp allows consumers to receive services equal to the value of a first-class postage stamp at the time of use. Permanent stamps are unique given their insensitivity to postal rate increases, thereby offering the potential to hedge against future postage rate increases. Moreover, postal services commonly pre-announce rate changes providing a several week notice before the change takes effect. The careful treasury manager conceivably can minimise mailing costs around postal increases by strategically purchasing permanent and forever stamps. Indeed, the enterprising entrepreneur might make a market by purchasing stamps prior to the rate change and selling them after for the new going rate. In this paper the authors develop a model to determine optimal stamp purchases around postal rate increases. The results indicate it is optimal for most individuals to purchase between a 90- and 730-day supply of permanent postage when a $0.01 increase in postage rates is imminent. From a policy perspective, the results imply that postal authorities should monitor permanent stamp purchase patterns to determine the optimal timing and magnitude of postal rate increases.
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