Modeling the demand for alcoholic beverages and advertising specifications

Abstract

AbstractIn this paper, the demand for beer, wine, spirits and soft drinks in Ontario is modeled in two parts: an equation is specifiec to endogenize group expenditures and a demand system is set up to allocate budgeted group expenditures across types o beverages. Advertising is allowed to influence both the level of group expenditures and its allocation. Three popula advertising specifications are compared using theJ‐test and the likelihood dominance criterion. Even though all threi specifications fitted well according to standard criteria, the calculated expenditure, price and advertising elasticities wen sensitive to the manner with which advertising is specified. This clearly highlights the need to rely on a sound criterion t< identify a dominant specification. From the identified dominant specification, we found that advertising has very subtle effect on expenditures on alcoholic beverages (group and individual beverages). Thus, advertising is not effective in enlarginj markets and this suggests that firms (especially breweries) use advertising to compete in zero‐sum market share games. From i public policy perspective, our results are comforting but future research should investigate whether the neutral effect o advertising on aggregated expenditures hide substantial offsetting changes in the drinking habits of individuals.