THE MEASUREMENT OF PRICE ELASTICITIES - THE BT EXPERIENCE

The telephony market in the UK has been subject to substantial structu ral change over the last five years. Examples of this change include t he growth of competition, the availability of volume related price dis counts, and the introduction of special offers. Under these conditions , the assessment of market response to price changes using elasticitie s obtained from traditional time series econometric methods becomes in valid, rendering forecasts potentially inaccurate. This paper explores three alternative techniques for estimating price elasticities: the c ross-sectional technique, the calculation of ''implied'' price sensiti vity to special offers, and the calculation of price elasticities of v arious market segments. Price elasticities will be shown to vary subst antially, depending on the method of analysis and situational characte ristics (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 paramete rs.