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Review of Agricultural Economics-Volume 20, Number I-Pages 69-79

The Effectiveness of Generic versus


Brand Advertising: The Case of U.S.
Dairy Promotion

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Harry M. Kaiser and Donald J. Liu

This article compares the effectiveness of generic versus. brand advertising for fluid milk
and cheese. The analysis is based on estimated fluid milk and cheese demand equations and
on an analysis of optimal reallocations between generic and brand advertising expenditures.
The issue of generic versus brand advertising effectiveness is examined in two ways. First,
the advertising elasticities of demand for fluid milk and cheese are computed and compared.
Second, optimal reallocation levels between generic and brand advertising expenditures are
simulated.
From the elasticity point of view, in two of the three estimated demand equations, the
generic advertising elasticity is larger than its brand counterpart. However, it is erroneous to
just look at advertising elasticities. The optimality condition must also be considered. The
optimal results suggest that dairy farmers could achieve increases in sale volumes and
revenues by reallocating some of the generic dollars to brand fluid advertising. The increases
in the sale volume and revenues from doing so are about 3% for volume and 1% for revenues.
However, the simulation results should be interpreted with care because as one moves away
from the historical advertising levels, the estimated equations used in the simulation become
less reliable. This is relevant because the optimal solutions call for large percentage
reallocations.
Finally, the results also suggest that dairy farmers should not divert generic dollars to
brand cheese advertising. A strategic implication is that dairy farmers should consider
establishing some type of fund matching relationship with brand fluid companies.

F armers in the United States invest almost $1 billion annually in checkoff pro-
grams for advertising and promotion, nutritional research, new product
development, and education programs (Forker and Ward). Much of the checkoff
money is devoted to generic advertising, which is a collective marketing strategy

• Harry M. Kaiser is associate professor in the Department ofAgricultural, Resource, and


Managerial Economics, Cornell University.
• Donald]. Liuis associate professor in theDepartment ofApplied Economics, University
ofMinnesota.
The authors thank Chanjin Chung for useful remarks on an earlier version of this paper and Jennifer
Ferrero for technical editing. Funding for this research came from the New York State Milk Promotion
Board.
70 Review ofAgricultural Economics

aimed at increasing the total demand for the commodity. In addition to generic
advertising, brand advertising by firms is also used for some commodities. Contrary
to generic advertising, brand advertising is intended to increase market share of the
firm through product differentiation. However, brand advertising may also increase
total demand especially if it reinforces characteristics common in the basic
commodity.
Agricultural economists have conducted numerous studies on the effectiveness
of generic advertising in increasing demand, prices, and profits to farmers.' Most of
these studies have measured the impact of generic advertising by including deflated

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generic advertising expenditures as a shift variable in the demand function. However,
brand advertising has not been included in the demand equation in the majority of
previous research.' Excluding brand advertising may result in biased estimated
coefficients since such advertising may have an impact on demand.
The fundamental question of this article is whether generic advertising is more
effective than brand advertising in generating additional market-wide sales. We
have two hypotheses on this issue.
The first hypothesis is that generic advertising is more effective than brand
advertising due to what we call the Cancellation Effect of Predatory Brand
Advertising. This means that brand advertising is designed to increase a firm's sales
at the expense of other firms' sales without the effect of increasing market-wide
sales. The second hypothesis is that brand advertising is more effective than generic
advertising because value-added product characteristics common in the commodity
can be more effectively conveyed via brand messages. Obviously, the debate on the
two hypotheses can only be resolved through empirical research.
Two dairy products, milk and cheese, are used as case studies to investigate this
empirical question. It is useful to look at milk and cheese since the dairy industry
has the highest investment in generic advertising of all commodities, and the dairy
industry also has a significant level of brand advertising. The analysis in the paper
is based on estimates of fluid milk and cheese demand equations, and simulations
of optimal reallocations between generic and brand advertising expenditures.

Background
Since Congress passed the Dairy and TobaccoAdjustment Act of 1983,dairy farmers
have been required to pay an assessment of fifteen cents per hundred pounds of
milk marketed in the continental United States to fund a national demand expansion
program.' The aims of this program, which exceeds $200 million each year, are to
increase consumer demand for milk and dairy products, enhance dairy farm revenue,
and reduce the amount of surplus milk purchased by the government under the
Dairy Price Support Program.
To increase milk and dairy product consumption, the National Dairy Promotion
and Research Board was established to invest in generic dairy advertising and
promotion, nutrition research, education, and new product development. Among
these activities, media advertising accounts for the largest expenditures (particularly
for fluid milk and cheese advertising). In addition to dairy farmers' generic
advertising efforts, fluid milk and cheese companies conduct brand advertising to
increase their own product sales. Currently, none of the dairy farmers' checkoff
revenues are used for brand advertising.
Generic vs. Brand Advertisingin U.S. DairyPromotion 71

Figures 1 and 2 present quarterly generic and brand advertising expenditures for
fluid milk and cheese, respectively, from 1975 to 1995.The expenditures are deflated
by the media cost index. Since there was no national program until 1984,the generic
fluid milk and cheese advertising expenditures prior to 1984 came exclusively from
state programs. It is worth noting that generic fluid advertising expenditures have
been substantially higher than brand fluid advertising. On the other hand, brand
cheese advertising expenditures have been higher than generic cheese advertising
levels.

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The Simulations
Dairy farmers could benefit by investing in brand advertising activities if this
reallocation resulted in a net gain in farm milk consumption. The econometric
estimates of generic and brand advertising elasticities provide some insights into
the percentage responsiveness of consumption to a 1% change in the expenditures
of alternative advertising schemes (see Appendix: The Estimation).
Weinclude in the appendix two fluid equations and one cheese equation. A second
cheese equation is not reported because the estimated coefficients are similar to the
one in the appendix. In both "Fluid Equation #1" and "Fluid Equation #2," the
coefficients for the generic fluid (GFLUID) and brand fluid (BFLUID)advertising
expenditure variables are both positive and statistically significant. The magnitudes
of the long-run advertising elasticities from the first fluid equation suggest that brand
fluid advertising elasticity (0.0433) is about 1.6 times larger than the generic fluid
advertising elasticity (0.027). On the other hand, the second fluid equation indicates
that generic fluid advertising elasticity (0.0324)is slightly larger than the brand fluid
advertising elasticity (0.026). In terms of the cheese equation in the appendix, the
long-run generic cheese advertising (GCHEESE) elasticity is estimated as 0.015 and
is significant, while the brand coefficient (BCHEESE)is positive, but not statistically
significant. The insignificant brand coefficient leads one to conclude that brand cheese
advertising has been ineffective in increasing aggregate consumption. This may be
due to the cancellation effect of the advertising campaigns of the various brand
companies.
The question here is: To what extent does advertising elasticity provide a basis
for deciding whether or not to invest in brand activities? For example, suppose the
generic advertising elasticity for a product is larger than the product's corresponding
brand advertising elasticity. Is it then correct to conclude that it would not be
profitable for the promotion group to shift some of its generic dollars to brand
activities? The answer is no because a 1% change in generic expenditures is not
necessarily the same in dollar terms as a 1% change in brand expenditures.
The limitation of the percentage comparison method becomes even more
pronounced when the proposed reallocation involves different product forms. In
this case, in addition to different bases between generic and brand advertising
expenditures, the quantity bases of the two product forms may also differ. Further,
due to classified milk pricing by federal milk marketing orders, one needs to be
explicit about the objective of the generic promotion activity when assessing the
desirability of reallocating expenditures across product forms of different milk classes
(e.g., fluid milk vs. manufactured dairy products)."
In particular, one needs to distinguish the difference between maximizing milk
72 Review of Agricultural Economics

Figure 1. Deflated generic and brand fluid milk advertising expenditures in


1975 $, 1975-95

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..-..
8 8,000
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~ ~ £: £: £: £: £: ~ ~ ~ ~ ~ ~ ~ ~
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--' £: £: £: £: £:
Year
1---- Generic~ Bran~
consumption quantity and maximizing sales revenues (or profit). If the objective is
to maximize sales revenues, the commodity group should concentrate on promoting
fluid milk (either via generic or brand scheme) so as to take advantage of the Class
I differential stipulated by federal milk marketing orders. In this case, it does not
make sense to shift generic fluid expenditures to promote manufactured dairy
products as long as the government is buying surplus dairy products.
The following two reallocation scenarios are considered: (1) a reallocation of a
portion of the generic fluid advertising expenditures to supplement the existing
brand fluid campaigns, and (2) a reallocation of a portion of the generic cheese
advertising expenditures to supplement the existing brand fluid campaigns. The
simulations need not include a scenario of reallocating a portion of the generic fluid
or cheese expenditures to brand cheese promotion, given the insignificant estimated
coefficient associated with the brand cheese advertising variable. The simulation
results are compared with those under the scenario of historical advertising patterns
(the base scenario) to determine the impact of the reallocation. For each scenario,
advertising expenditures are reallocated ranging from 10% to 90% (in 10%
increments) of the generic advertising expenditures in question. This procedure
enables one to compute the marginal sale volumes and marginal revenues from
reallocations, and identify the optimal reallocation levels. The analysis is conducted
Generic vs. Brand Advertisingin U.S. Dairy Promotion 73

Figure 2. Deflated generic and brand cheese advertising expenditures in 1975 $,


1975-95

16,00

14,00

12,00

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6"
o
o
E 10,00
.~
I
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8,000

"'t$
~ 6,000
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4,000

2,000

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IT I
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~
;.~ III I III III IIII III I III IIII III I III IIII IIII III II II III IIII II II III
00 g g ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
Year
I~GeneriC---- Brandl

for the period extending from the first quarter of 1985 to the third quarter of 1995,
which corresponds to the life of the National Dairy Promotion and Research Board.

Scenario #1: Generic fluid to brand fluid


This scenario involves the reallocation of generic fluid expenditures to the brand
fluid campaigns. To illustrate, consider a 10% reallocation of generic expenditures.
What would be the impact of this reallocation on milk consumption? Notice that
the ratio of generic fluid expenditures to brand fluid expenditures during the
simulation period is about 3.5. Thus, a 10% reallocation away from generic category
amounts to a 35% increase in brand expenditures. Based on Fluid Equation #1, the
ratio of brand to generic advertising elasticity is about 1.6. It follows that the positive
consumption impact of the 35% increase in the brand expenditures will be more
than enough to outweigh the negative consumption impact of the 10% reduction in
the generic expenditures. Specifically, the positive impact will be 5.6 (3.5 * 1.6) times
larger than the negative impact.
The above simple analysis suggests that a reallocation, up to a point, of the generic
fluid expenditures to brand promotion activities should result in a higher fluid milk
consumption. This conjecture is ascertained by the simulation results reported in
74 Review ofAgricultural Economics

Table 1. Simulation results

Scenario #1 Scenario #2
Generic Fluid to Branded Fluid Generic Cheese to Branded Fluid
Percentage Change in Class I
Quantity and Class I Revenue Percentage Change in
Reallocation Based on Fluid Based on Fluid Combined Class I Percentage Change in
Level Equation #1 Equation #2 and Cheese Quantity Class I Revenues

10% 1.44% 0.56% 0.70% 0.26%


20% 2.30% 0.91% 1.15% 0.45%

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30% 2.85% 1.04% 1.47% 0.59%
40% 3.19% 1.03% 1.70% 0.71%
50% 3.35% 0.88% 1.85% 0.81%
60% 3.34% 0.57% 1.94% 0.90%
70% 3.12% 0.06% 1.96% 0.97%
80% 2.59% -0.78% 1.86% 1.04%
90% 1.37% -2.38% 1.54% 1.11%

the first column of table 1. A 10% reallocation of the generic fluid expenditures in
favor of brand advertising will result in a 1.44% increase in the Class I quantity (i.e.,
milk used for fluid purposes). The percentage impact on Class I volume increases
with further increases in this reallocation, reaching a maximum impact of 3.35% at
the 50% reallocation level. The simulation results under the objective of maximizing
Class I revenue are identical to those under the quantity maximizing objective
because the dollar benefit to the additional Class I milk quantity (arising from the
reallocation) is simply the exogenous Class I differential.
It is interesting and insightful to see whether the above policy prescription will
change dramatically if Fluid Equation #2 is adopted instead. Recall that this
alternative fluid equation resulted in the brand advertising elasticity being lower
than its generic counterpart. The ratio of the brand to generic advertising elasticity
based on this equation is 0.8, suggesting that a reallocation of generic fluid
expenditures to brand campaigns might not be profitable. However, this turns out
not to be the case because, as mentioned, a 10% reduction in the generic expenditures
is equivalent to a 35% increase in the brand expenditures. Specifically, the positive
demand impact of the 35% increase in the brand expenditures will be 2.8 (3.5 * 0.8)
times larger than the negative demand impact of the 10% reduction in the generic
expenditures. The second column of table 1 reports the simulation results using
Fluid Equation #2. A 10% reallocation of the generic fluid expenditures in favor of
brand campaigns will result in a 0.56% increase in the Class I quantity and revenue.
The maximum impact is 1.03% reached at the 40% reallocation level. This result is
surprisingly similar to the one under Fluid Equation #1.As such, only Fluid Equation
#1 will be used in the next scenario involving both fluid and cheese demand
equations.

Scenario #2: Generic cheese to brand fluid


This scenario involves reallocating some of the generic cheese expenditures to the
brand fluid campaigns. Based on Fluid Equation #1 and the estimated cheese
Genericvs. Brand Advertising in U.S. Dairy Promotion 75

equation, the elasticity ratio of brand fluid advertising to the generic cheese
advertising is about 0.6. Thus, on the surface, the proposed reallocation calls for a
shift to an inferior advertising scheme. Again, this need not be true.
Notice that the ratio of generic cheese expenditures to brand fluid expenditures
during the simulation period is about 2.0; a 10% reduction in the generic cheese
expenditures will be accompanied by a 20% increase in the brand fluid expenditures.
As such, the positive fluid demand impact of the 20% increase in brand fluid
expenditures is going to be 1.2 (2 * 0.6) times larger than the negative cheese demand
impact of the 10% reduction in generic cheese expenditures." So one expects the

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reallocation, up to a point, to result in a higher combined fluid and cheese quantity
and higher Class I revenues.
The simulation results are reported in the last two columns of table 1. For example,
a 10% reallocation of the generic cheese expenditures in favor of brand fluid
advertising results in a 0.70% increase in the sum of fluid and cheese quantities and
0.26% increase in the Class I revenue. The optimal level of reallocation is 70% under
the Quantity Maximization Objective and 90% under the Class I Revenue
Maximization Objective,"

Summary and Conclusions


The purpose of this article was to compare the effectiveness of generic versus brand
advertising for fluid milk and cheese. The analysis was based on estimated fluid
milk and cheese demand equations, and an analysis of optimal reallocations between
generic and brand advertising expenditures. The issue of generic versus brand
advertising effectiveness has been examined in two ways. First, the advertising
elasticities of demand for fluid milk and cheese have been computed and compared.
Second, optimal reallocation levels between generic and brand advertising
expenditures have been simulated.
From the elasticity point of view, in two of the three estimated demand equations,
the generic advertising elasticity was larger than its brand counterpart. It would be
erroneous to just look at the advertising elasticity coefficients, as the optimality
condition must also be considered. From an optimality point of view, the results
suggest that dairy farmers could achieve increases in sale volumes and revenues by
reallocating some of the generic dollars to brand fluid advertising. The increases in
the sale volume and revenues from doing so are about 3% for volume and 1% for
revenues. However, the simulation results should be interpreted with care because
as one moves away from the historical advertising levels, the estimated equations
used in the simulation become less reliable. This is relevant because the optimal
solutions call for large percentage reallocations (35% for Scenario 1 and 70% for
Scenario 2). Finally, the results also suggest that dairy farmers should not divert
generic dollars to brand cheese advertising.
A strategic implication of the results is that dairy farmers should consider
establishing some type of fund matching relationship with brand fluid companies.
For example, the National Dairy Promotion and Research Board could match any
additional brand expenditures above a fluid milk company's current advertising
level. This type of policy would not only result in a closer to optimal balance between
brand and generic advertising, but also motivate additional brand fluid expenditures
from private companies. Obviously, the National Dairy Promotion and Research
76 Reviewof Agricultural Economics

Board would want to closely monitor such a program to ensure that dairy farmers'
brand investment motivates additional expenditures rather than merely replaces
the existing brand expenditures.

Endnotes
1See Ferrero et al. for a thorough review.
2 Several exceptions include a yogurt study by Hall and Foik; a New York cheese study by Kinnucan
and Fearon; and a Florida orange juice study by Lee and Brown.
3 For more detail on the national generic dairy promotion program, see the 1996 United States
Department of Agriculture: Report to Congress on the Dairy Promotion Program.

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4 Milk used for fluid purposes is called Class I milk. Federal milk marketing orders set a price wedge,

called the Class I differential, between Class I milk and milk used for manufactured products purposes.
5 In working this simple calculation, it is assumed that the ratio of fluid quantity and cheese quantity
is one. The actual ratio is 1.1 for the simulation period.
6 The result of reallocating all generic cheese expenditures (i.e., 30% of them) to fluid campaigns is not
surprising. Under Revenue Maximization Objective, the commodity group should concentrate on
promoting fluid milk in order to take advantage of the Class I differential.

References
Ferrero, J., L. Boon, H. M. Kaiser, and O. D. Forker. "Annotated Bibliography of Generic Commodity
Promotion Research (Revised)." Cornell University Department of Agr., Res., and Managerial
Economics NICPRE 96 (3): 96-103, February 1996.
Forker, O. D., and R. W. Ward. Commodity Advertising: The Economics and Measurement of Generic
Programs. New York: Lexington Books, 1993.
Hall, L. L., and I. M. Foik. "Generic vs. Brand Advertising for Manufactured Milk Products-The Case
of Yogurt." N. C. J. Agr. Econ. 5 (1982): 19-24.
Kaiser, H. M., O. D. Forker, J. Lenz, and C. H. Sun. "Evaluating Generic Dairy Advertising Impacts on
Retail, Wholesale, and Farm Milk Markets." J. Agr. Econ. Res. 44 (1994): 3-17.
Kinnucan, H., and D. Fearon. "Effects of Generic and Brand Advertising of Cheese in New York City
with Implications for Allocation of Funds." N. C. J. Agr. Econ. 8 (1986): 9-107.
Leading National Advertisers, Inc. (LNA). AD & Summary. New York. Selected Issues, 1975-1995.
Lee, J. Y., and M. G. Brown. "Economic Effectiveness of Brand Advertising Programs for United States
Orange Juice in the European Market: An Error Component Analysis." J. Agr. Econ. 37 (1986): 385-94.
Liu, D. J., H. M. Kaiser, O. D. Forker, and T. D. Mount. "An Economic Analysis of the U.S. Generic
Dairy Advertising Program Using an Industry Model." N.E. J. Agr.and Resource Econ. 19 (1990): 37-48.
U.S. Department of Agriculture, Economic Research Service. Dairy Situation andOutlook. Selected Issues,
Washington DC, 1975-95.
U.S. Department of Agriculture, Economic Research Service. USDA Report to Congress on the Dairy
Promotion Program. Washington DC, 1996.
U.S. Department of Labor, Bureau of Labor Statistics. Consumer Price Index. Selected Issues, Washington
DC, 1975-95.
U.S. Department of Labor, Bureau of Labor Statistics. Employment and Earnings. Selected Issues,
Washington DC, 1975-95.
Ward, R. W., and B. L. Dixon. "Effectiveness of Fluid Milk Advertising Since the Dairy and Tobacco
Adjustment Act of 1983." Amer. J. Agr. Econ. 71 (1989): 730-40.
Wohlgenant, M. K., and C. R. Clary. "Development and Measurement of Farm-to-Retail Price Linkage
for Evaluating Dairy Advertising Effectiveness." J. Agr. Econ. Res. 44 (1994): 18-27.

Appendix: The Estimation


Time series data from the first quarter of 1975 through the third quarter of 1995
are used to estimate fluid and cheese demand equations. Variable definitions and
source of data are given in table AI. Each equation is specified in double-logarithmic
form and, in general, includes such conventional economic variables as own price,
price of substitutes, and income. The consumer price index for nonalcoholic
Generic vs. BrandAdvertising in U.S. DairyPromotion 77

Table At. Variable definitions and data sources

Variable Definition Unit Source a

QFLUID Commercial fluid milk demand billion lbs. of milk Dairy Situation and Outlook
fat equivalent
QCHEESE Commercial cheese demand billion lbs. of milk Dairy Situation and Outlook
fat equivalent
PFLUID Retail fluid milk price index 1982 - 1985 = 100 Consumer Price Index
PCHEESE Retail cheese price index 1982 -1984 = 100 Consumer Price Index
PBEV Retail non-alcoholic beverages 1982 -1984 = 100 Consumer Price Index

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price index
PMEAT Retail meat price index 1982 -1984 = 100 Consumer Price Index
CPI Consumer price index 1982 -1984 = 100 Consumer Price Index
for all items
INCOME Disposable personal income billion $ Employment and Earnings
GFLUID Generic fluid advertising thousand $ Leading National Advertisers,
expenditures, deflated by Inc.
the Media Cost Index (1975=1.0)
GCHEESE Generic cheese advertising thousand $ Leading National Advertisers,
expenditures, deflated by Inc.
the Media Cost Index (1975=1.0)
BFLUID Branded fluid advertising thousand $ Leading National Advertisers,
expenditures, deflated by Inc.
the Media Cost Index (1975=1.0)
BCHEESE Branded cheese advertising thousand $ Leading National Advertisers,
expenditures, deflated by Inc.
the Media Cost Index (1975=1.0)
QUARTER Quarterly dummy variable 0-1
TREND Trend variable 1975:1 = 1
DUMMY Dummy variable 1990 - 1995 = 1
1990
AR Autoregressive residual term
MA Moving - average residual term
In Natural logarithmic operator
PDL Second-order polynomial distributed lag operator

a See the reference section for a complete bibliographic citation of each source.

beverages is used as a proxy price for fluid milk substitutes, and the meat price
index is used in the same way for cheese substitutes. All the price and income
variables are deflated by the consumer price index for all items or by other deflators
as discussed below.
Also included in the demand equations are generic advertising expenditures,
brand advertising expenditures, quarterly seasonal dummy variables, and lagged
demand to account for consumer habit formation. The advertising expenditures are
deflated by the media cost index. The carry-over effects of advertising are captured
via second-order polynomial distributed lag functions of the current as well as
previous four quarters' expenditures, with both end-point restrictions imposed
(Kaiser et al.; Liu, et al.; Ward and Dixon; and Wohlgenant and Clary). In the case of
the cheese equation, a dummy variable (1990 to 1995 equals one) is also included to
account for possible structural change in the demand due to gains in experience of
program managers since the inception of the national promotion program in 1985.
The simultaneity problem between demand quantity and own price is dealt with
78 Reviewof Agricultural Economics

by adopting the instrumental variable procedure of regressing own price on its one
period lag, a trend variable, and a first-order autoregressive term for residuals. Finally,
to correct for serial correlation, autoregressive (AR) or moving average (MA) terms
for the residuals are identified and added to the demand equations whenever
appropriate.
The first set of estimated demand equations are presented in table A2 under the
headings, "Fluid Equation #1" and "Cheese Equation #1." The coefficients associated
with income (INCOME/CPI) and the beverage price (PBEV/CPI) in the fluid
equation are both positive and statistically significant. The own price coefficient

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(PFLUID/CPI) also has the correct sign, but is not significant. The coefficients for
the generic fluid (GFLUID) and brand fluid advertising (BFLUID)variables are both
positive and statistically significant. The magnitudes of the long-run advertising
elasticities, however, suggest that brand fluid advertising elasticity (0.0433) is about
1.6 times larger than the generic fluid advertising elasticity (0.0270).
In terms of the cheese equation in table A2, the coefficients associated with income
(INCOME/CPI), own price (PCHEESE/CPI), and the meat price (PMEAT/CPI) all
have the correct signs and are statistically significant. The long-run generic cheese
advertising (GCHEESE) elasticity is estimated as 0.015 and is significant, while the
brand coefficient (BCHEESE) is positive, but not statistically significant.
To ensure the robustness of our policy recommendation presented in the text,
alternative specifications of the fluid and cheese equation are entertained. The results
of this exploration indicate that the previous finding of an insignificant brand cheese
advertising coefficient is robust; the estimated coefficient in all cases turns out to be
insignificant. However, we were able to find at least one alternative fluid specification
where the generic fluid advertising coefficient was larger than the brand fluid
advertising coefficient. As it stands, it may be insightful to also include this alternative
fluid specification in the simulation to determine whether or not the resulting policy
conclusions differ significantly.
The above mentioned equation is reported in table A2 under the heading "Fluid
Equation #2." Rather than deflating income and own price by the consumer price
index for all items, this fluid specification uses the substitute price (PBEV) as the
deflator. Toimprove the statistical fit of the equation, a trend variable is also included
as a regressor under this specification. As argued in Liu et al., the time trend can be
thought of as capturing the effect of changes in consumer preferences over time,
specifically, the increasing concern about the link between heart disease and fluid
milk consumption.
The income and own-price variables have the correct signs and are statistically
significant. The generic and brand advertising coefficients are again both positive
and statistically significant. However, the coefficient magnitudes from the current
specification suggest that the long-run generic fluid advertising elasticity (0.0324)is
slightly larger than the brand fluid advertising elasticity (0.0260). Based on a set of
diagnostic tests conducted (including the Durbin-H Statistic; Ljung-Box Q-Statistic
for higher-order serial correlation; a [arque-Bera Normality Test; a residual test for
Autoregressive Conditional Heteroskedasticity; White's test for model
misspecification; and Chow's Forecast Test for structural stability), the three estimated
demand equations in table A2 are deemed adequate for simulation analysis.
Generic vs. Brand Advertisingin U.S. Dairy Promotion 79

Table A2. Estimation results

Dependent Variables
In (QFLUID)* In (QCHEESE)
Fluid Equation #1 Fluid Equation #2 Cheese Equation #1
Independent Variables Coef t-ratio Coef t-ratio Coef t-ratio
Constant 0.170455 2.5 0.231851 3.3 -0.821563 -2.1
Quarter 1 -0.058844 -12.6 -0.058067 -12.4 -0.111183 -11.1
Quarter 2 -0.091674 -18.8 -0.090657 -17.5 -0.040963 -4.3
Quarter 3 -0.045691 -12.3 -0.046506 -11.4 -0.060793 --6.8

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In (Trend) -0.009377 -1.7
Dummy 1990 0.091301 4.4
In (QFLUIDt_1) 0.853342 14.6 0.857987 20.6
In (QCHEESEt_1) 0.298552 3.0
In (INCOME/CPI) 0.055795 2.0 0.715836 5.0
In (PFLUID/CPI) -0.009011 -0.5
In (PBEV/ CPI) 0.021044 2.7
In (INCOME/PBEV) 0.047339 2.8
In (PFLUID/PBEV) -0.056748 ~3.1
In (PCHEESE/CPI) -0.526042 -2.5
In (PMEAT/CPI) 0.178186 1.7
Long-Run GFLUID 0.0270 1.6 0.0324 1.9
Elasticity**
Long-Run BFLUID 0.0433 5.0 0.0260 1.7
Elasticity**
Long-Run GCHEESE 0.0150 1.8
Elasticity**
Long-Run BCHEESE 0.004 0.2
Elasticity**
MA(l) -0.723516 -4.4
MA(2) -0.274677 -2.1
MA(3) 0.292488 2.4
MA(4) -0.278603 -2.3
AR(l) -0.504047 -4.6
AR (2) -0.554563 -4.7
R2 0.96 0.96 0.99
Durbinh 0.2 -0.43 -0.81

* In is the naturallogarithrnic operator


** Long-run advertising elasticities are the sum of the current and previous four quarter advertising
coefficients. To account for the lagged dependent variable, the sum of the coefficients is divided by one
minus the coefficient for the lagged demand variable.