os Soteri

Disaggregated Letter Traffic Demand in the UK

All national post offices offer an extensive range of mail products to customers. It is likely that the various demand elasticities of these products differ across services (for example, products grow at different rates in response to economic growth or are more or less responsive to a given price change) and that there is some degree of substitutability between at least some products. It is also the case that the impact on volumes from developments such as electronic substitution and competitive entry may vary across services. Consequently, it is important to have an understanding of the demand for mail products at a disaggregated level. There are various approaches that, in principle, could be adopted to gain such understanding but, where data are available, one which is well suited at a relatively high level of aggregation is econometric modelling using time series data.

Delivery Costs for Postal Services in the UK

This paper stresses the importance of the treatment of heterogeneity between delivery offices when estimating economies of scale in outdoor mail delivery activity. We show that models estimated with cross-section data can give biased results and that panel data models encompass cross- section models. In practice this means that empirical estimates of economies of scale in delivery will be underestimated when using cross-section data and researchers should, where possible, adopt panel estimation techniques. In line with these findings we have estimated cost functions for UK outdoor mail activities using panel data that take into account observed heterogeneity by using variables describing the environmental characteristics of delivery offices. Among these variables, the proportion of traffic delivered by non rural routes is introduced in a non linear way (with a stratification of the sample) into the cost models and we find strong evidence of UK outdoor mail delivery activities exhibiting returns to scale with respect to volumes per delivery point that lie in the range of less than 2 to over 4 according to the value of this proportion. These results are consistent with other studies on outdoor delivery costs in France and the USA and add to the growing international literature that substantial fixed costs are incurred in outdoor mail delivery activities.

E-Substitution and the Demand for Business Mail in the UK: Trends and Prospects

In recent years there has been a significant reduction in the volume of addressed letter mail in most developed countries including the UK (PwC 2013).

Analysing the prospects for transactional Mail using a sender-recipient framework

We build an analytical model a la Hotelling describing the process of e-substitution in the market for transactional mail. A generic firm sells a final good to customers, with each unit sold requiring one unit of communication between firm and customer, which can take the form of either letter mail or of an e-substitute. A fraction of customers has no access to the e-substitute technology, and the other customers differ in their exogenous preference for mail vs substitute. Also, the communications strategy of the business impacts on the demand for its final product, with letter mail may be preferred for some types of communications, on the grounds that it could increase overall demand. We then calibrate the model and show how the extent of e-substitution depends on the distribution of preferences, the objective function of the representative firm, and on how much mail impacts the firm’s final demand. We conclude with suggestions as to how this analysis may inform a postal operator intent on slowing down e-substitution.

An Examination of the Links Between Postal Price Constraints, Efficiency, Competition and Public Welfare

Mail volumes in developed countries are in decline while universal service obligations (USOs) and uniform pricing constraints on some mail products remain in place.

Analysis of the Effect of Management Quality Variables in Delivery Cost Functions

Letter volumes in countries with advanced broadband networks have been in decline since the early to mid-2000s while, more recently, parcel volumes have started to grow quite rapidly. The main drivers of these trends, namely the substitution of physical letters with electronic modes of communication and increasing levels of on-line shopping, are expected to continue for some time. This raises two important challenges for postal universal service providers (USPs). The first is to manage operational changes to meet the evolving needs of consumers, such as changes in the quantity, shape, size and weight of mail sent and received. Second, USPs need to reduce costs and increase efficiency as quickly as is practically possible in order to help slow the decline in letters and to compete more effectively with other parcel providers.

Price Elasticities and Factors Driving International Contract Export Mail Sent from the UK to Western European Countries

In the economics literature traditional export demand functions in gravity models are a function of the exchange rate, economic activity and distance between countries. Models of this type provide a useful framework to examine international mail traffic. For example, Anson and Helble (2013) and Anson et al. (2014) have estimated international gravity models using econometric techniques and the latter have concluded that favorable exchange rate movements stimulated parcel dispatches within the Asia and Pacific region.

Pricing and Efficiency Decisions for Letter and Parcel Markets when Industrial Relations Matter

A key feature of postal markets today is the changing mix of physical mail. While the demand for letters is in decline, predominantly because of e-substitution, parcel volumes are increasing due to the rapid growth of e-commerce. Universal service providers (USPs) in the postal sector serve both markets. In the former, universal service obligations (USOs) are in place and regulators and private shareholders, where the USP is privatized, press for improvements in efficiency. In the latter, markets are highly competitive with parcel companies offering differentiated services. In both markets, USPs are under pressure to lower costs and prices to maintain financial viability. But postal operations are labor intensive and the pressure to lower costs poses a threat of industrial action.