Measuring and testing advertising-induced rotation in the demand curve

Abstract

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.

Acknowledgements

The authors wish to thank two anonymous referees for their valuable comments on an earlier draft of this article. Responsibility for final content, however, rests with the authors.

Funding for this research was provided by the New York State Milk Promotion Advisory Board, and the National Institute for Commodity Promotion Research Evaluation.

Notes

¹ In essence, real information plays the same role as the match-products-to-buyers effect discussed by Bagwell (2005, p. 19).

² The two models used by Schmit and Kaiser and Chung and Kaiser were the same in functional form. The latter study used per capita fluid milk sales as the dependent variable while the former one used per capita retail fluid milk/cheese demand instead.

³ As noted by Farr et al. (2001) and Tremblay and Okuyama (2001), advertising also could affect equilibrium consumption through its influence on supply (price competition). For simplicity, we focus strictly on demand-side effects.

⁴ Green and Alston (1990) show that all of the previously reported formulae for AIDS elasticities are incorrect when LA-AIDS is estimated instead of the true AIDS with a few exceptions including constant group price, i.e. dln P* is independent of individual goods’ prices. This condition is satisfied since this article assumes exogenous prices.

⁵ Note −(c_ii + γ _i dln A_i )/w_i is the Hicksian own-price elasticity for the Rotterdam model. The Marshallian own-price elasticity is equal to −(c_ii + γ _i dln A_i )w_i − b_i . The effect of advertising on the Marshallian own-price elasticity is derived as .

⁶ In 2005, the volume shares of the three largest nonalcoholic beverage categories by volume were carbonated soft drinks (43.8%), bottled water (21.6%) and fluid milk (17.8%), according to Beverage Marketing Corporation.

⁷ Results of t-statistics were much improved from using OLS to SUR, but remained alike from SUR to iterative SUR.

⁸ For completeness purpose, all c_ii ’s, d_ii ’s and γ _i ’s were used to calculate the own demand elasticities but only significant c_ii ’s, d_ii ’s and γ _i ’s were used to calculate the own advertising elasticities and the interaction-related rotation effects except the d_ii in model J to avoid a negative own advertising elasticity for coffee and tea; price, demand, and advertising took their mean levels when they were needed.