Advertising and Differentiated Products: Volume 10

A two-stage Rotterdam model is estimated to determine the effects of advertising on the demand for non-alcoholic beverages in the United States. Results suggest that advertising has no effect on the demand for non-alcoholic beverages taken as a group. However, the hypothesis that advertising has no effect on the distribution of demand within the non-alcoholic beverage group is firmly rejected. Coffee and tea are most affected by other beverage advertising, and milk the least. Similarly, juice advertising exerts the largest influence within the beverage group, and milk advertising the least. Overall, however, the major determinants of the consumption pattern are relative prices and structural change.

Time-series models of the demand for alcoholic beverages have been criticized for use of annual data; omitted variables; mis-measurement of advertising; simultaneous equations bias; and inadequate attention to nonstationarity and dynamics. This paper reappraises the relationship between alcohol advertising, price, and consumption in a manner which speaks to these issues. Using quarterly data from 1970:1 to 1990:4 on three beverages (beer, wine, and distilled spirits), we find evidence of cointegration between beverage consumption, prices, advertising, and real income. Elasticities obtained from the estimated cointegrating vectors indicate that long-run beverage demands are both price and income inelastic. Moreover, after correcting for each of the problems described above, advertising has virtually no influence on the steady-state level of alcoholic beverage consumption.

In this paper we analyze the efficiency effects of state-mandated exclusive distribution territories in the U.S. beer industry. Using panel data for 48 states over a 10-year period we estimate both fixed-effects and instrumental-variable models of the impact of mandated exclusive territories on beer consumption. We find that standard OLS regressions of beer consumption suffer from selection bias, due to the endogeneity of state statutes. Correcting for this bias we estimate exclusive territory mandates increase consumption by between three and eleven%. Our results therefore indicate that exclusive territories in the beer industry increase social welfare and enhance the well-being of consumers.

Market provision of radio programming is beset by possible inefficient underprovision of formats that appeal to small audiences, for which the social benefits of programming — but not advertising revenue — exceed their costs. Larger markets have more programming, so their listeners derive benefits from being in the same market as others with similar preferences, a mechanism we term “preference externalities.” Yet, because white and minority content preferences are substantially different, preference externalities are positive only within group. We expect problems of inefficient underprovision to be more likely for small minority populations. We find evidence that policies promoting minority ownership increase the amount of minority-targeted programming.

Existing analyses of circulation industries have often postulated that consumers consider advertising to be a “bad,” thereby requiring publishers to subsidize cover price (and thus circulation revenue) with advertising revenues. This paper uses data describing 117 U.S. magazines for the years 1996–1998 to determine the value of advertising in a magazine bundle. For four of five magazine genres, advertising is found to increase average newsstand circulation and newsstand price. These results indicate that advertising is a shift parameter in the newsstand demand for magazines, as opposed to the alternative hypothesis that advertising is a bad that subsidizes cover price.

This paper attempts to broaden our understanding of retail pricing dynamics by providing some systematic evidence about U.S. grocery prices. Using a large data set containing prices on twenty categories of goods from thirty U.S. metro areas for the period 1988–1997, we find a number of empirical regularities. Sales are common phenomenon in that retailers seem to have a “regular” price, and most deviations from that price are downward. There is also considerable heterogeneity in sale behavior across goods within a category, such as cereal. Within each category of goods, retailers regularly put some items on sale, while other items are rarely, if ever, put on sale. Finally, the probability of a sale on an item appears to be greater when demand for that item is higher. These results suggest that retailers use complicated strategies in pricing the items they sell that differ across items and over time. Studies that use retail prices and do not account for the process determining retail prices are likely to yield misleading results.

Services now play a remarkably prominent role in modern economies. Not surprisingly, economists and marketing researchers have begun to turn their attention to the analysis of activities in the so-called tertiary sector. In this chapter we attempt to contribute to the effort of systematizing the analysis of service institutions by integrating perspectives from the economic analysis of institutions and property rights, on the one hand, and the economic analysis of retailing and distribution services, on the other hand In so doing, we propose a set of evaluative criteria to be applied to the assessment of the evolution of service institutions, as well as a tableau for analyzing the emergence of various institutional forms. The tableau organizes the three primitive economic activities of production, distribution, and consumption on temporal and spatial dimensions. As such, the tableau applies the notion of relational constraints that have the property of reducing uncertainty and transaction costs, thus being welfare enhancing. The tableau and the evaluative criteria enable us to explore a range of issues, such as joint-ness of production and consumption, divided ownership of property rights, and the effects of technological progress that are inherent in the process of product innovation in services.

This paper examines the asymptotic (in)efficiency of Stackelberg markets with incomplete information. Firms who are early in the queue make their quantity choices based on limited information and their output choices are likely to deviate from those optimal under complete information. Due to the presence of both payoff externality and information externality, the output deviations of early firms have a lasting effect on all subsequent output decisions. Consequently, the total market output diverges from the competitive equilibrium output even as the number of firms goes to infinity. That is, Stackelberg markets with incomplete information are asymptotically inefficient with probability one.

We develop a competitive advertising model, where a firm's advertising spending can be divided into two parts. One part, which we call generic advertising, affects only total market demand. The second component of that spending, brand advertising, affects market share directly, but may also have an effect on total market demand. We investigate how the profit margins of the firms, the advertising elasticities, the base market shares of the firms, and the market demand effect of brand advertising interact to determine the total amount of advertising spending in the market, who pays and how they pay (the ratio of generic to brand advertising). We also show that, in general, a market where generic advertising expenditures are set cooperatively will see higher expenditures of generic advertising than will a purely competitive market.

In this paper, we analyze the impact of advertising and quality decisions on price competition in a duopoly setting. Firms are able to differentiate their products vertically and use persuasive advertising to increase consumer brand loyalty. The model predicts that the high quality firm will advertise more intensively than the low quality firm in both covered and uncovered markets. Because consumers are assumed to be informed about product characteristics, advertising neither signals high quality nor discourages firms from lowering product quality unexpectedly. Instead, advertising is persuasive and is used to dampen price competition, enabling firms to avoid the Bertrand Paradox. This model provides one explanation for the coexistence of name (heavily advertised) and generic (sparsely advertised) brands.

This chapter surveys the literatures on advertising bans and alcohol consumption or abuse, and advertising expenditures and alcohol consumption. Studies of state-level bans of billboards are examined as well as studies of international bans that cover broadcasting media. For expenditures, the survey concentrates on econometric methods and the existence of an industry advertising-sales response function. Selected results from survey-research studies of advertising and youth alcohol behaviors also are discussed. The chapter concludes that advertising bans do not reduce alcohol consumption or abuse; advertising expenditures do not have a marketwide expansion effect; and survey-research studies of youth behaviors are seriously incomplete as a basis for public policy. Results of the survey are applied to the Supreme Court's Central Hudson test for constitutionality of restrictions on commercial speech.