Abstract
The share of advertising expenditure going to letter mail has been declining for many years. While this has mainly been due to an increasing focus on digital advertising spend other factors, such as the price of letter mail, are also important. In order to help inform advertising letter mail pricing strategies this chapter provides price elasticity estimates conditional on customers using Royal Mail retail advertising products. The overall price elasticity estimated for this customer group was around −0.7 but tended to increase in absolute value by customer size and vary substantially by industry sector. For example, customers operating in the Finance and Insurance and Utilities sectors were estimated to be highly sensitive to price movements with estimated price elasticities of −1.5 to −2.6 respectively. Additional analysis was undertaken for customer sub-samples. However due to potential issues related to selection bias these results should be viewed as directional in nature and subject to further research.
The views expressed in this paper are those of the authors and do not necessarily reflect those of their affiliated organizations.
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Notes
- 1.
Estimates informed by figures from various World Advertising Research Center (WARC) Expenditure Reports.
- 2.
USPS estimated price elasticities refer to Standard Regular mail which is mainly used to send advertising mail.
- 3.
Model specifications including various economic activity and other variables were initially included and yielded similar results.
- 4.
Note that ln(p) in (3) and (4) is equal to the sum of the instrumental variable for the price variable, ln(\( \widehat{p} \) ijt) and the residual constructed from the instrumental regression \( {\widehat{u}}_{ijt} \). Specifying the model as in (3) and (4) can be considered to be more transparent as the test of endogeneity is performed directly by examining the estimated coefficients associated with \( {\widehat{u}}_{ijt} \).
- 5.
The relative weights for the sectors where Commercial Services (9%), Finance and Insurance (2%), Information and. Communications (38%), Manufacturing (6%), Other (16%), Public Services (4%), Postal Services (1%), Retailers and Wholesalers (22%), Transportation and Storage (2%) and Utilities (<1%).
- 6.
In general, if a customer switched from using a Royal Mail retail product to sending mail via an access competitor, which is most likely to be the case when we observe a continuous string of zero values for a retail advertising customer, then all information on the customer becomes unobservable.
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Fève, F., Magnac, T., Veruete-McKay, L., Soteri, S. (2018). How Price Sensitive Is Letter Advertising Mail in the UK?. In: Parcu, P., Brennan, T., Glass, V. (eds) New Business and Regulatory Strategies in the Postal Sector. Topics in Regulatory Economics and Policy. Springer, Cham. https://doi.org/10.1007/978-3-030-02937-1_16
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