Price elasticity of demand for stamps
The BBC reports that PostComm - the postal service industry regulator has given initial backing for Royal Mail to increase the cost of a standard first-class stamp by three pence. This would take the price up to 42p. At the same time, standard second-class stamps may rise by 2p to 32p. How will consumers respond to the price change? For many the price hike will have little effect - most of the stamps that I buy can be reclaimed as stationery expenses. But many smaller businesses spend heavily on mailshots as a part of their marketing. A rise in mail costs may cause them to consider making more effective use of their customer databases so that - for example - a 3000 mail shot volume is better targeted than before. Do you think that the price elasticity of demand for stamps is price inelastic - at least in the short term?
The Royal Mail is subject to a price cap agreed with their industry regulator. Since the Royal Mail?s current price control was agreed in 2006, the Royal Mail has lost 9% of its mail volumes over the three year period to April 2009, largely through shrinkage of the total market including 20% of stamped mail. The Royal Mail has also had to face up to increased competition as the postal market has been fully opened up to competition.
Shrinking mail volumes has the effect of reducing capacity utilisation of their collection, sorting and delivery capacity and leads to a rise in the unit costs of the business. The Royal Mail is required by law to operate a universal service across the UK; it is a business that requires substantial economies of scale to remain profitable.
