Advertising and US alcoholic beverage demand: system-wide estimates

The effects of advertising on consumption of alcoholic beverages in the US are analysed. The goal is to obtain evidence on the importance of advertising at the level of beverage demand(beer, wine, spirits) and for total consumption of alcohol (per capita gallons of ethanol). A three-equation conditional demand system is estimated that includes own- and cros-beverage advertising as explanatory variables. Four models of the differential demand system are estimated, including the Rotterdam, AID, CBS, and NBR models, using annual US data for the period 1964-90 on beverage consumption, prices, expednitures, and real advertising. Estimates are obtained of the complete matrix of own- and cross-elascities for each beverage’ price and advertising. At the beverage level, the results indicate a positive butr very small effect of advertising on beverage consumption, with most of the impact due to wine advertising and non due to beer advertising. There is no efect of advertising in the composite demand function for alcohol. Hence, the results from system-wide modelling suggest that alcohol advertising serves to reallocate brand sales, with no effect on total ethanol consumption and very small effects on beverage consumption.     

ADVERTISING RESTRICTIONS, COMPETITION, AND ALCOHOL CONSUMPTION

Distilled spirits producers recently voted to eliminate their voluntary ban on broadcast advertising. The ban received public support because of the high social cost associated with alcohol consumption and the belief that advertising promotes alcohol consumption and abuse. In spite of this belief, the empirical evidence indicates that advertising has no significant effect on the market demand for distilled spirits. This evidence has led many policy economists to conclude that eliminating the ban will have no effect on alcohol consumption. The purpose of this research is to show that this conclusion is incorrect because it ignores the fact that advertising restrictions may affect industry competition as well as market demand.     

Advertising and Restrictions in the Cigarette Industry: Evidence of State-by-State Variation

Many studies estimate the relationship between advertising and consumption in the cigarette industry, with emphasis directed toward the national demand for cigarettes. However, in light of evidence that cigarette producers price discriminate across U.S. states, coupled with possible affects of advertising on market power, this article takes a less aggregate perspective by addressing the role of cigarette advertising and restrictions at the state level. The results show that although advertising has little effect on demand, it generally increases market power in the cigarette industry (particularly during periods of heightened advertising restrictions). Furthermore, the relationship between advertising, demand, and supply vary across states. (JEL L13 , L66 , I18 )     

Price Dynamics in Repeat-Purchase Markets*

A retail market in which customers repeat purchase is modelled. When customer movement between firms is sluggish, price overshooting characterizes firms' optimal response to demand or cost shocks. Thus retail prices would be predicted to be more variable than wholesale prices, a prediction at variance with empirical evidence. Uncertainty in demand and customer imperfect information are introduced into the model to attempt to reconcile this inconsistency between theory and evidence. The introduction of demand uncertainty actually increases the magnitude of price overshooting. By contrast, the introduction of imperfect customer information reduces the variability in retail prices.     

Advertiser pressure and control of the news: The decline of muckraking revisited

Many scholars argue that advertiser influence prevents commercial news media from reporting truthfully on harmful business practices. Yet overt evidence of advertiser influence on the news can be elusive, partly because fear of offending advertisers may lead news organizations to censor themselves. An apparent departure from self-censorship, however, is the anti-business reporting that characterized the muckraking era of the early 20th century. We therefore examine muckraking's demise as a case study of potential advertiser influence. As alternative hypotheses of muckraking's decline, our tests seek to distinguish between an advertising boycott and a fall in reader demand for muckraking content. The tests involve comparing market performances of muckraking and non-muckraking magazines, and estimating the determinants of advertising in muckraking magazines. We generally find no evidence to support the hypothesis of an advertising boycott.     

Household response to dynamic pricing of electricity: a survey of 15 experiments

Since the energy crisis of 2000–2001 in the western United States, much attention has been given to boosting demand response in electricity markets. One of the best ways to let that happen is to pass through wholesale energy costs to retail customers. This can be accomplished by letting retail prices vary dynamically, either entirely or partly. For the overwhelming majority of customers, that requires a change out of the metering infrastructure, which may cost as much as $40 billion for the US as a whole. While a good portion of this investment can be covered by savings in distribution system costs, about 40% may remain uncovered. This investment gap could be covered by reductions in power generation costs that could be brought about through demand response. Thus, state regulators in many states are investigating whether customers will respond to the higher prices by lowering demand and if so, by how much. To help inform this assessment, this paper surveys the evidence from the 15 most recent pilots, experiments and full-scale implementations of dynamic pricing of electricity. It finds conclusive evidence that households respond to higher prices by lowering usage. The magnitude of price response depends on several factors, such as the magnitude of the price increase, the presence of central air conditioning and the availability of enabling technologies such as two-way programmable communicating thermostats and always-on gateway systems that allow multiple end-uses to be controlled remotely. In addition, the design of the studies, the tools used to analyze the data and the geography of the assessment influence demand response. Across the range of experiments studied, time-of-use rates induce a drop in peak demand that ranges between 3 and 6% and critical-peak pricing (CPP) tariffs induce a drop in peak demand that ranges between 13 and 20%. When accompanied with enabling technologies, the latter set of tariffs lead to a reduction in peak demand in the 27–44% range.     

A Microeconometric note on product innovation and product innovation advertising

This paper seeks to explain why more than half of the German service sector firms that introduce a product innovations do not advertise their new or markedly improved product. One part of the explanation is that they do not need to advertise because they are closely related to their customers anyway, and another part of the explanation is that product innovation and product innovation advertising are strategic substitutes.     

Advertising media and cigarette demand

Using state-level panel data for the USA spanning three decades, this research estimates the demand for cigarettes. The main contribution lies in studying the effects of cigarette advertising disaggregated across five qualitatively different groups. Results show cigarette demand to be near unit elastic, the income effects to be generally insignificant and border price effects and habit effects to be significant. Regarding advertising effects, aggregate cigarette advertising has a negative effect on smoking. Important differences across advertising media emerge when cigarette advertising is disaggregated. The effects of public entertainment and Internet cigarette advertising are stronger than those of other media. Anti-smoking messages accompanying print cigarette advertising seem relatively more effective. Implications for smoking control policy are discussed.     

TV advertising spillovers and demand for private labels: the case of carbonated soft drinks

The expansion of private labels, or store brands, has transformed consumer choice sets and competition in retail markets, prompting manufacturers to fight back with renewed pricing and product and promotion strategies to forestall further private label expansion. This article examines the spillover effects of television advertising on brand-level consumer demand for carbonated soft drinks (CSDs), including private labels, using a random coefficients logit model with household purchasing and advertising viewing Nielsen data. As in previous work, we find that although brand spillover effects significantly increase demand for CSD brands in the same company and undermine demand facing other manufacturers’ CSD brands, surprisingly, there are positive spillover effects on the demand for private label brands. This indicates that brand advertising is persuasive with respect to manufacturers’ brands but complementary with respect to private labels. Further results show that eliminating television advertising for CSDs would lower aggregate CSD sales as consumers migrate to other beverages, although private labels stand to gain, particularly Wal-Mart brands.     

QUALITY COMPETITION WITH STOCHASTIC DEMAND AND COSTLY SEARCH: THEORY AND EVIDENCE FROM THE VIDEO RENTAL MARKET

A theoretical model is developed to predict optimal service rates in markets where firms compete in availability. We show that firms are more likely to stock-out of popular products as the cost of consumer search increases. Carlton (1978) showed that, in a zero-profit competitive environment, firms balance the risk of not being able to serve a particular customer against the cost of holding excess capacity and that this balancing act will result in an equilibrium in which not all customers are served. The model was later adapted to oligopolistic competition by Peters (1984) and Deneckere and Peck (1995) . This paper extends this literature on competition under stochastic demand by developing a model that incorporates 1) the possibility that customers may be able to purchase from another firm in the case of a stock-out and 2) the option for firms to offer an imperfect substitute in order to persuade some customers to make a purchase when the first choice product is out of stock. Empirical evidence is presented in support of the theoretical model using data collected from video rental outlets in a midsize southeastern US city.     

Advertising effects in complete demand systems

A rationale for including advertising in complete demand systems is presented. An advertising analogue of the Slutsky equation is derived, and properties of the expenditure and indirect utility functions characterized. Empirical estimates of a complete demand system incorporating dynamic advertising effects support neoclassical restrictions; we do not reject homogeneity, or symmetry at the 1% level. This represents surprisingly strong support for neoclassical theory relative to prior parametric studies.     

A model of advertising with application to the German automobile industry

This paper develops a dynamic duopolistic model of advertising and price competition. Advertising accumulates a stock of goodwill which enters directly into the demand functions and both the cooperative and predatory effects of advertising are considered. It is shown that firms invest more in advertising the higher the degree of cooperativeness of advertising and some comparative static results are provided. In the second, empirical part of the article, estimations of the demand equations are presented using data from the German automobile industry. The main conclusion drawn is that advertising plays an important role in this market and has a predatory nature.     

On generic vs. brand promotion of farm products in foreign markets

Farm groups and their governments spend millions of dollars each year advertising agricultural products in international markets. Intuitively, country-of-origin or ‘brand’ advertising should be more profitable than generic advertising in that it enhances product differentiation and reduces free riding. However, unlike generic advertising, brand advertising decreases the demand for competing imports and lowers their prices when supplies are upward sloping. In addition to inviting retaliation, the decline in the prices of competing products erodes the price of the advertised product through second-round or ‘market feedback’ effects. In this study, we develop a generalized model for assessing the relative effectiveness of generic and brand promotion in the international market when products are differentiated by source origin and supplies are uncontrolled. Applying the model to US beef promotion in Japan, we find that when brand and generic advertising are equally efficient in the sense that they cause equivalent horizontal shifts in the group and product-specific demand curves, generic advertising is indeed more profitable for most of the relevant parameter space. Distributional analysis suggests that, with equal export supply elasticities, the gross benefits of generic advertising are distributed across exporters in proportion to the expenditure elasticities for the products in question.     

Advertising in demand systems: testing a Galbraithian hypothesis

In this paper we argue that the influence of advertising upon the inter-product distribution of demand is a system-wide phenomenon which is investigated better through a demand equation system rather than through single equation methods. Attention is focused upon a dynamic version of Deaton Muellbauer's AIDS model modified to include advertising terms. Within this framework using data on consumer's non-durable expenditure in the UK we carry out a preliminary test of Galbraith' hypothesis that advertising may affect the composition of aggregate consumer demand.     

A factor analysis approach to measure the biased effects of retail fruit juice advertising

This study presents a structural factor analysis approach to measure the impact of advertising on consumer demand. It is assumed that advertising affects the latent perception of consumers, which in turn influences their purchasing behavior. This study investigates the relationship between consumer purchases and retail store advertising (i.e., newspaper advertising, in-store display, and point-of-purchase display) of three fruit juices using an extended Rotterdam model. The results show that the demand for orange juice and grapefruit juice was affected by their own advertising, while the demand for apple juice was only affected by advertising of competitive juices.The authors are a Senior Econometrician, TRS Risk Management, American Express Company; and a Research Economist, Florida Department of Citrus, and Adjunct Professor, Food and Resource Economics Department, University of Florida, respectively.The authors thank B. Dixon, A. Reynolds, S. Shonkwiler, H. Theil, K. Young, editor, and other anonymous reviewers for comments and suggestions. The usual disclaimer applies. This study was partially supported by the McKethan-Matherly Eminent Scholar Chair at the University of Florida.     

A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

Manufacturer's pricing strategy in a two-level supply chain with competing retailers and advertising cost dependent demand

The paper studies a two-echelon supply chain comprising one manufacturer and two competing retailers with advertising cost dependent demand. The manufacturer acts as the Stackelberg leader who specifies wholesale price for each retailer. The two retailers compete with each other in advertising and they have different sales costs. The manufacturer uses one of the following two pricing strategies: (i) setting the same wholesale price for both the retailers irrespective of the difference in their sales costs; (ii) setting different wholesale prices for the retailers depending on their sales costs. Two models are developed. In the first model, the manufacturer shares a fraction of each retailer's advertising cost while in the second model, the manufacturer does not share any retailer's advertising expenses. In both the models, we derive the retailers' and manufacturer's optimal strategies. A numerical example is given to illustrate the theoretical results developed in each model. Computational results show that it is always beneficial for the manufacturer to adopt different wholesale pricing strategy for the retailers.     

Endogenous direct advertising and price competition

This paper analyzes how the use of endogenous direct advertising affects the functioning of a horizontally-differentiated market. We formulate a two-stage game of pricing and informative advertising in which two firms, first, compete with mass advertising and, later, build a database using their historical sales records and compete by directly targeting the ads on their potential customers. We show that, compared to the case where firms only use mass advertising, direct advertising yields higher advertising efforts and an intertemporal reallocation of both market power and profits from the first to the second period. We also find that targeting increases the overall firms’ profit and the level of social welfare, but the impact on the average intertemporal price and consumer surplus is ambiguous. Finally, when reaching the potential market with mass advertising is sufficiently expensive, the use of direct advertising leads firms to provide the socially optimal level of advertising whereas, if mass advertising is cheap, firms tend to launch too little advertising in the first period and too much in the second.     

Estimating demand function parameters of mobile applications

The vibrant market for mobile applications has raised awareness of several professional and also voluntary software developers. The key question especially for professional developers is how to improve the profit gained with a developed app. Recent research provided evidence on the factors that determine the demand of a mobile app. This paper presents a procedure to estimate demand function parameters that are required for developing pricing, advertising and also product update strategies. More specifically, the procedure estimates an app’s maximal willingness to pay, demand elasticity on price and network value. The procedure is based on the Fulfilled Expectations Cournot Model and requires knowledge about the apps being considered as substitutes to each other. It is applied to a data set consisting of download rank data of Apple iPhone apps.     

Measuring and testing advertising-induced rotation in the demand curve

Advertising can rotate the demand curve if it changes the dispersion of consumers’ valuations. We provide an elasticity form measure of the advertising-induced demand curve rotation in five demand models and test for its presence in the US nonalcoholic beverage market. The Almost Ideal Demand System (AIDS) model reveals that doubling advertising spending rotates the demand curves clockwise for milk, and coffee and tea with associated slope changes of 7 and 12%. Soft-drink advertising rotates its demand curve counterclockwise. Our policy suggestion is that milk and soft-drink firms time advertising to coincide with high-and low-price periods, respectively.