Does Generic Advertising Wrap Demand Curvature?
This paper reconsiders the impacts of generic advertising on commodity prices that may be induced through demand effects. Rather than considering a simple demand shift, we consider the possibility that advertising leads to a change in the curvature of the demand curve. In this case, generic advertising is shown to affect both the level of market prices as well as their volatility. Based on parametric tests, we find that the demand elasticity appears to be affected by the intensity of generic advertising. In addition, we find evidence that generic advertising affects the curvature of the demand curve. We examine the implications of these findings for the price of beef. Our results are consistent with the hypothesis that generic advertising enhances price level, while reducing price volatility. The latter result follows from evidence generic advertising increases the convexity of the demand curve with respect to price. The result suggests that generic advertising may provide a mechanism for stabilizing prices. The results also suggest that at any point in time, the effects of generic advertising can be decomposed into a shift and "twist" or curvature change. We present this decomposition and note that it implies the existence of a threshold price. At prices above this threshold, generic advertising will decrease the price elasticity of demand, while below this threshold, generic advertising will increase the price elasticity. This result suggests clearly that the demand effects of generic advertising are price dependent. The extent of this effect deserves further examination though findings in this paper strongly motivate further study.
|Date of creation:||2002|
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