Revisiting the Dorfman‐Steiner Static Advertising Theorem: An Application to the Processed Grapefruit Industry

Abstract

Dorfman and Steiner's article in the early 1950s set forth the theorem that firm which can influence the demand for its product by advertising will, in order to maximize its profits, choose the advertising budget and price such that the increase in gross revenue resulting from a one dollar increase in advertising expenditures is equal to the ordinary elasticity of demand for the firm's product(p. 826). This theorem has similar implications for an industry when in fact the industry can influence the total level of advertising. In particular, the theorem provides an additional policy tool for many commodity markets where the producers of the commodity support a generic-type advertising program. The simplicity of the Dorfman and Steiner theorem is appealing; however, its empirical counterpart is often difficult to generate due to the complexity of measuring advertising effectiveness. This paper will, however, present an application of the theorem where the simplicity of the DorfmanSteiner demand model is representative of the industry studied. Specifically, an empirical measure of the effectiveness of generic advertising of canned, single-strength grapefruit juice (CSSGJ) is presented (Ward). The model is useful for evaluating alternative advertising levels when the commodity price can and cannot be influenced by aggregate industry pricing strategies. Two policy questions of primary concern to the processed grapefruit industry relate to what the effects of the overall generic advertising program have been and what gains could be realized if better coordination of advertising and pricing were possible. The Dorfman-Steiner theorem is relevant for addressing these questions. A review of the Dorfman-Steiner theorem will be presented in the first section followed by a description of the marketing system for CSSGJ. An application of the theorem and its implication for the grapefruit industry are discussed in the last two sections.