Abstract
This study derives an optimal commodity advertising intensity rule for a vertically related market under bilateral oligopoly. The new optimality condition derived in this study extends the seminal Dorfman-Steiner Theorem [1] and recently published optimal advertising conditions by two major aspects. First, we strengthen the previous work by considering potential market power exertion in all buying (input) and selling (output) markets, i.e., all four adjacent upstream and downstream markets of processors and retailers. Second, we use a primal production function approach to avoid the symmetry assumption that many earlier studies imposed on conjectural elasticities of input and/or output markets. Our new condition suggests that, without considering the potential market power exertions, the optimal advertising intensity and expenditures are overestimated. Our derivation also indicates that previous optimal advertising conditions derived under the assumption of fixed proportion technology could underestimate the optimal intensity and expenditures, particularly when advertising elasticity is elastic.
Highlights
Generic commodity advertising has pursued to increase producers’ profits for various agricultural commodities
The new optimality condition derived in this study extends the seminal Dorfman-Steiner Theorem [1] and recently published optimal advertising conditions by two major aspects
We strengthen the previous work by considering potential market power exertion in all buying and selling markets, i.e., all four adjacent upstream and downstream markets of processors and retailers
Summary
Generic commodity advertising has pursued to increase producers’ profits for various agricultural commodities. The money to fund these commodity advertising programs is collectively raised through producers’ checkoff programs, which require producers to pay a specified amount of money on per unit or value assessment. One important issue in running these advertising programs is to determine the condition of optimal advertising intensity. Beginning with Dorfman and Steiner [1]’s seminal work, numerous studies have examined the opti-
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