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Optimal Generic Advertising In An Imperfectly Competitive Food Industry With Variable Proportions

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  • Kinnucan, Henry W.

Abstract

This paper determines the impact of food industry market power on farmers' incentive to promote in a situation where funds for promotion are raised through a per-unit assessment on farm output and food industry technology is characterized by variable proportions. Specifically, building on earlier studies by Azzam and by Holloway, Muth's model is extended to consider the farm-level impacts of generic advertising when downstream firms possess oligopoly and/or oligopsony power and advertising expenditure is endogenous at the market level. Applying the model to the U.S. beef industry, we find that for plausible parameter values market power reduces farmers' incentive to promote. However, the disincentive is moderated by factor substitution, and effectively vanishes as the factor substitution elasticity approaches the retail demand elasticity. This suggests that the Dorfman-Steiner theorem, suitably modified to account for factor substitution, suffices to indicate optimal advertising intensity in the U.S. beef sector.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19775.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19775

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Keywords: Dorfman-Steiner theorem; generic advertising; oligopoly power; oligopsony power; Marketing; L66; Q13; Q17;

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References

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  1. John A. L. Cranfield & Ellen W. Goddard, 1999. "Open Economy and Processor Oligopoly Power Effects of Beef Advertising in Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 47(1), pages 1-19, 03.
  2. John R. Schroeter & Azzeddine M. Azzam, & Mingxia Zhang, 2000. "Measuring Market Power in Bilateral Oligopoly: The Wholesale Market for Beef," Southern Economic Journal, Southern Economic Association, vol. 66(3), pages 526-547, January.
  3. Henry W. Kinnucan, 1999. "Optimal Generic Advertising Decisions in Supply-managed Industries: Clarification and Some Further Results," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 47(1), pages 57-66, 03.
  4. Freebairn, John W. & Alston, Julian M., 2001. "Generic advertising without supply control: implications of funding mechanisms for advertising intensities in competitive industries," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 45(1), March.
  5. Ferrero, Jennifer L. & Boon, Leen & Kaiser, Harry M. & Forker, Olan D., 1996. "Annotated Bibliography of Generic Commodity Promotion Research," Research Bulletins 122819, Cornell University, Department of Applied Economics and Management.
  6. Richard J. Sexton, 2000. "Industrialization and Consolidation in the U.S. Food Sector: Implications for Competition and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(5), pages 1087-1104.
  7. Azzam, Azzeddine M. & Schroeter, John R., 1995. "The Tradeoff Between Oligopsony Power and Cost Efficiency in Horizontal Consolidation: An Example from Beef Packing," Staff General Research Papers 5062, Iowa State University, Department of Economics.
  8. Mary K. Muth & Michael K. Wohlgenant, 1999. "A Test for Market Power Using Marginal Input and Output Prices With Application to the U.S. Beef Processing Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 638-643.
  9. John D. Jackson, 1997. "Effects of Health Information and Generic Advertising on U.S. Meat Demand," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 13-23.
  10. Quilkey, John J., 1986. "Promotion Of Primary Products - A View From The Cloister," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 30(01), April.
  11. H. W. Kinnucan, 1996. "A Note On Measuring Returns To Generic Advertising In Interrelated Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 47(1-4), pages 261-267.
  12. Waterson, Michael, 1980. "Oligopoly and derived demand," Economics Letters, Elsevier, vol. 5(2), pages 115-118.
  13. Nouhoun Coulibaly & B. Wade Brorsen, 1999. "Explaining the differences between two previous meat generic advertising studies," Agribusiness, John Wiley & Sons, Ltd., vol. 15(4), pages 501-515.
  14. Kinnucan, Henry W., 1997. "Middlemen behaviour and generic advertising rents in competitive interrelated industries," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 41(2), June.
  15. R. W. Ward & C. Lambert, 1993. "Generic Promotion Of Beef: Measuring The Impact Of The Us Beef Checkoff," Journal of Agricultural Economics, Wiley Blackwell, vol. 44(3), pages 456-465.
  16. Azzeddine Azzam, 1998. "Captive Supplies, Market Conduct, and the Open-Market Price," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 76-83.
  17. E. W. Goddard & M. L. McCutcheon, 1993. "Optimal Producer Investment in Generic Advertising: The Case of Fluid Milk in Ontario and Quebec," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 41(3), pages 329-347, November.
  18. Zhang, Mingxia & Sexton, Richard J., 2000. "Optimal Commodity Promotion In Imperfectly Competitive Markets," 2000 Annual meeting, July 30-August 2, Tampa, FL 21823, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  19. Henry W. Kinnucan & Maria Thomas, 1997. "Optimal Media Allocation Decisions For Generic Advertisers," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1-3), pages 425-441.
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Citations

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Cited by:
  1. Wang, Xiuqing & Weldegebriel, Habtu T. & Rayner, Anthony J., 2006. "Price Transmission, Market Power and Returns to Scale," Working Papers 46004, Scottish Agricultural College, Land Economy Research Group.
  2. Freebairn, John W. & Goddard, Ellen W. & Griffith, Garry R., 2005. "When Can a Generic Advertising Program Increase Farmer Returns?," Australasian Agribusiness Review, University of Melbourne, Melbourne School of Land and Environment, vol. 13.
  3. Habtu T. Weldegebriel & Xiuqing Wang & Anthony J. Rayner, 2012. "Price transmission market power and industry technology: a note," China Agricultural Economic Review, Emerald Group Publishing, vol. 4(3), pages 281-299, October.
  4. Nilsson, Tomas K.H. & Foster, Kenneth A., 2005. "Certification of Pork Products," 2005 Annual meeting, July 24-27, Providence, RI 19350, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Hailong Cai & Xiuqing Wang, 2010. "The substitution effect of cigarette excise tax for tobacco leaf tax in China," China Agricultural Economic Review, Emerald Group Publishing, vol. 2(4), pages 385-395, November.
  6. Chung, Chanjin & Eom, Young Sook & Yang, Byung Woo & Han, Sungill, 2013. "Optimal Generic Advertising under Bilateral Imperfect Competition between Processors and Retailers," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149582, Agricultural and Applied Economics Association.
  7. Chung, Chanjin & Henneberry, Shida Rastegari & Tostao, Emilio, 2004. "Will The Voluntary Checkoff Program Be The Answer? An Analysis Of Optimal Advertising And Free-Rider Problem In The U.S. Beef Industry," 2004 Annual Meeting, February 14-18, 2004, Tulsa, Oklahoma 34694, Southern Agricultural Economics Association.
  8. Cai, Hailong & Kinnucan, Henry W., 2009. "The Compensative Effects of Tobacco Leaf Price Changes on Tax Revenue in China," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46727, Southern Agricultural Economics Association.

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