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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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  • Kinnucan, Henry W., 2003. "Optimal generic advertising in an imperfectly competitive food industry with variable proportions," Agricultural Economics, Blackwell, vol. 29(2), pages 143-158, October.
    • Handle: RePEc:eee:agecon:v:29:y:2003:i:2:p:143-158
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    2. Chanjin Chung & Youg Sook Eom & Byung Woo Yang, 2014. "Optimal Generic Advertising under Bilateral Imperfect Competition between Processors and Retailers," Agribusiness, John Wiley & Sons, Ltd., vol. 30(4), pages 438-455, September.
    3. 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).
    4. Henry W. Kinnucan & Yuqing Zheng, 2004. "Advertising's effect on the market demand elasticity: A note," Agribusiness, John Wiley & Sons, Ltd., vol. 20(2), pages 181-188.
    5. Ying Lin & Henry W. Kinnucan, 2020. "The optimal export tax for a primary commodity in a vertical market," Agricultural Economics, International Association of Agricultural Economists, vol. 51(6), pages 909-922, November.
    6. Benjamin Henderson & Lynn Henry & Gordon MacAulay & Jen Tatuh, 2010. "Potential Payoff from R&D in the Coconut Industry of North Sulawesi, Indonesia," Asian Economic Journal, East Asian Economic Association, vol. 24(1), pages 69-85, March.
    7. 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 Limited, vol. 4(3), pages 281-299, August.
    8. Hiew, Lee-Chea & Puah, Chin-Hong & Habibullah, Muzafar Shah, 2013. "The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function," MPRA Paper 50223, University Library of Munich, Germany.
    9. 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 Limited, vol. 2(4), pages 385-395, November.
    10. 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, Department of Agriculture and Food Systems, vol. 13.
    11. Wang, Ping & Kinnucan, Henry W. & Duffy, Patricia A., 2017. "Effects of China's Rising Labor Costs on the World Cotton Market," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258431, Agricultural and Applied Economics Association.
    12. 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.

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    JEL classification:

    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade

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