The measurement of price elasticities-The BT experience

The telephony market in the UK has been subject to substantial structural change over the last five years. Examples of this change include the growth of competition, the availability of volume related price discounts, and the introduction of special offers. Under these conditions, the assessment of market response to price changes using elasticities obtained from traditional time series econometric methods becomes invalid, rendering forecasts potentially inaccurate. This paper explores three alternative techniques for estimating price elasticities: the cross-sectional technique, the calculation of ‘implied’ price sensitivity to special offers, and the calculation of price elasticities of various market segments. Price elasticities will be shown to vary substantially, depending on the method of analysis and situational characteristics (broadly categorised as simple, structural, and special offer). The authors conclude that elasticities should be viewed by managers as instruments one can try to manipulate rather than as fixed parameters.