Price discrimination in third class postal rates in the database marketing industry: The single-user case

Abstract

This paper offers a conceptual basis for price discrimination in postal rates for large users of third class mail in the database marketing industry. We make the point that in some cases it pays to lower third class postal rates for selected mailers because it increases the revenues of the postal authority. At the core of the approach is a procedure to estimate the user's demand function for mailing services, which is formulated as a derived demand, reflecting the characteristics and the purchasing propensity of the customers in the database. Taking the postal authority's point of view, we seek the optimal postal fare that maximizes the postal authority's total net profits. The problem is solved for a representative company involving realistic data, nine products, and a combined total universe of close to 10 million customers.