Delivery Costs for Postal Services in the UK

6 Conclusion

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.

Reparameterising the estimated model allows further insights into the key factors underpinning the existence of economies of scale in UK outdoor mail delivery activities. Namely, that economies of scale are primarily due to the concentration of traffic per delivery point and that the extent to which Royal Mail benefits from economies of scale depends on the relative growth rate of mail volumes versus the number of delivery points. In general the estimated cost model suggests that the greater the rate of traffic growth relative to the number of delivery points the greater the degree to which Royal Mail benefits from economies of scale and vice versa. These are powerful conclusions to draw from the estimated cost function and suggest that postal policies on the future of the postal markt.