Analyzing the Prospects for Transactional Mail Using a Sender-Recipient Framework.

Summary 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.