Fluid milk consumption and demand response to advertising for non-alcoholic beverages

K Rickertsen,G.V Gustavsen

doi:10.23986/afsci.5709

Abstract

Norwegian fluid milk consumption has declined steadily over the last twenty years, despite the dairy industry spending increasing amounts of money on advertising. Using a two-stage model, we investigate whether advertising has increased the demand for milk. No effect of advertising on the demand for non-alcoholic beverages is found in the first stage. In the second stage, an almost ideal demand system including advertising expenditures on competing beverages is estimated. The effects of generic advertising within the beverage group are positive and significant for whole milk and negative and significant for lower fat milk. The own-advertising elasticity for the combined fluid milk group is 0.0008. This highly inelastic elasticity suggests that increased advertising will not be profitable for the producers. Several cross-advertising effects are statistically significant, emphasizing the usefulness of a demand system approach.

Highlights

1970 and 1995 while the fluid milk consumption declined by 22 percent (Putnam and Allshouse 1997)
The decline in milk consumption causes concern in the dairy industry and it is of considerable interest to investigate to what extent the observed changes can be explained by factors the dairy industry itself can influence, such as changes in advertising
The Norwegian Dairy Cooperative’s advertising expenses on fluid milk increased from about NOK 1.3 million in 1975 to about 20 million by the end of the period. This is a substantial increase in real terms, since the consumer price index (CPI) quadrupled over the period

Summary

Introduction

As a first approximation, we set the world market price (P1 in Fig. 3) to zero and assume that the opportunity cost of advertising expenditure is zero Under these assumptions, a 1 percent increase in advertising expenditures (NOK 200,000) would increase the demand for milk by about 5,000 liters with a value of NOK. Since the average annual per capita sales of whole and lower fat milk were 95 and 59 liters, respectively, the net effect of advertising on the total demand for fluid milk is low. We calculated the share weighted own-advertising elasticity for the combined fluid milk group to be 0.0008 This low value compares reasonably well with Goddard et al.’s (1992) estimate for Canada and Kinnucan et al.’s (2001) estimate for the US, which were found using demand systems. 5 were found by single-equation methods and they are in most cases substantially higher indicating that single-equation models may overstate the effects of advertising

4: Hot drinks

Findings

Conclusions