Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 14: Letter traffic demand in the UK: some new evidence and review of econometric analysis over the past decade
Prospects for letter mail volumes are an important driver of business decisions for national postal operators. In particular, assessments of the demand for letter traffic inform operational investment decisions, influence the structure of regulatory controls and are a key variable in business valuations. Econometric studies of the demand for mail emphasize the importance of three key factors in assessing the prospects for letter traffic demand: economic activity; multi-modal competition in the communications market; and the price of letters. This chapter provides new insights to assess prospects for UK letter demand by updating and extending the econometric analysis undertaken by Veruete-McKay et al. (2011) by an additional, and eventful, 15 quarters of information. During this period: the UK entered a severe recession from which it has not yet recovered; technological change affecting the mail market continued at a rapid pace; competition in the upstream mail market substantially increased; and prices for some products rose substantially. This new information provides a rich source of data to further our understanding of the drivers of the demand for letters. In particular, our econometric analysis provides updated estimates for economic activity and price elasticities and also quantitative estimates of the extent to which e-communications and competition from other traditional media are reducing the demand for letters. In addition, this chapter extends the approach to modeling UK letter demand in Nankervis et al. (2002) to provide new insights into the extent to which upstream competition is impacting the price elasticities of specific segments of the letters market.
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