Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 5: Estimating postal demand elasticities using the PCAIDS method
Difficult economic conditions in Europe and worldwide, along with continuing pressure from competitive entry, electronic substitution, and other factors, continue to put pressure on posts and mail volumes. Of key importance to the continued operation of postal markets and the Universal Service Obligation (USO) is pricing regulation that balances cost reflectivity, the need to finance the USO, and the need to meet competition dynamically. Some of the more interesting issues and challenges within this context are that some mail products might be facing negative impacts from e-commerce (e-substitution ñ for example, small letters), while other products might be more akin to complements than substitutes with e-commerce (for example, online ordering of packages). The ambiguous impact of this and other facets of e-substitution illustrate the continuous need to estimate the drivers of mail demand and the sensitivity of mail demand to price changes. Within the context of these challenges, among the more important parameters to estimate for the postal economist are the price elasticities of demand for postal services. As there is a host of postal products, there is a corresponding host of price elasticities to be estimated. Product definition can vary by a large number of parameters, including weight, format, class (speed), franking method, volume, and delivery receipt.
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