Distributional effects of generic dairy advertising throughout the marketing channel

Abstract

AbstractIf generic advertising is effective at increasing the demand for the advertised product, then there will not only be direct effects on the sponsors of the advertising, but also indirect effects on other market participants. This article addresses two such distributional issues using the U.S. dairy industry as a case study. First, how are fluid milk and cheese processors impacted by cheese and milk advertising conducted by farmers? We find that the welfare of both processor classes is improved due to the dairy farmer advertising program for fluid milk and cheese products. Second, how are fluid milk (or cheese) processors impacted by the other product's farmer‐funded advertising? As expected, own‐product advertising increased equilibrium output levels, while cross‐advertising impacts slightly reduced supply levels. Generic advertising, regardless of product, positively affected fluid milk processor gross margins, while increases in cheese advertising reduced the price margin for cheese processors. In general, own‐product advertising had larger price margin impacts for fluid milk processors, while cheese processors benefited more from larger supply gains. These larger supply effects translated further into larger increases in raw milk costs tightening cheese price margins. Because changes in cheese supplies affect both Class I and Class III prices, input prices to processors are affected relatively more by increases in cheese advertising, as opposed to fluid milk advertising. The relatively larger gains in output prices, combined with lower relative increases in input class prices contributed to higher producer welfare impacts for fluid milk processors than cheese processors when confronted with equivalent increases in their own‐product advertising. [EconLit citations: Q130, Q180]. © 2003 Wiley Periodicals, Inc. Agribusiness 19: 289–300, 2003.