Petrol, Postage and Pasties: (2) Postage

This week Britain's Royal Mail announced that the price of a first class stamp will rise from 46pence to 60pence at the end of April 2012, and the price of a second class stamp will rise from 36pence to 50pence on the same date.  The Independent carried an article in its Business section headed "Royal Mail may be sealing its demise with rises in prices".  What was interesting was the paragraphs about modelling. 

The figures indeed suggest that increasing the price of stamps has ensured that revenues have fallen less quickly than the volume of letters. But if you increase prices by too much you run the risk of it being counter-productive. People will see sending anything through the post as a luxury and cut back sharply. The fall in revenues that results from this might not be compensated for by the sharp rise in prices. Losses will escalate.
Royal Mail has naturally done lots of modelling that argues against this outcome. The trouble is that when businesses do modelling to see how a controversial measure might work in practice they usually get the sort of results that they want. Particularly if they hire consultants to do the modelling for them. 

However, there is no prior experience of a 30% price rise, so any model of the effect of such a change on the volume of mail is speculation - it is extrapolation beyond the range of validity of the data.  And so the model becomes a piece of fiction, and the mantra "Garbage In, Garbage Out" applies.  Royal mail has claimed that other countries have similarly priced postal services, but not all models of elasticity of demand transfer between countries.

I know that Royal Mail has used Operational Research in the past, but I hope that this model was not created by an OR person; please, please, don't build models without defensible data!


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