Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 4: Are US postal price elasticities changing?
There are several good reasons to suspect that price elasticities of demand for US postal services are changing over time. Substitutes for postal services, such as email, websites, and electronic transactions, have increasingly become available to postal customers via the Internet. At the household level, the demand for a product tends to become more price elastic as new substitutes appear. This occurs even when the substitutes are the product of an indirect competitor such as the Internet. On the other hand, an aggregate price elasticity may decline as price-sensitive households shift more rapidly to substitute services than households with less elastic demands. Furthermore, a price elasticity may change over time in any direction as the result of movements along a productís demand curve if the curve is not constant elastic. US postal price elasticities may change simply because the prices change. The price elasticities presently used to predict the impact of real price changes on US postal volumes and revenues are mostly taken from econometric models that treat these elasticities as fixed. The models are fitted to quarterly time series extending back many years (see Pearsall, 2005 and 2011; and USPS, 2013 and earlier). Most recently Bozzo et al. (2013) have fitted a vector error correction model (VECM) version of the United States Postal Service (USPS) model. In this chapter we examine an econometric model of demand for 18 categories of US mail using demand equations with non-fixed price elasticities.
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