Advertising and Consumer Welfare: Scaling versus Translating

Controversy has surrounded the welfare effects of advertising, mainly concerning the consumer welfare effects. Unfortunately, the measures of consumer welfare effects in most studies have been ad hoc and incorrect. The consumer welfare consequences of advertising can be measured consistently when consumer demand equations are derived from an expenditure function. This is illustrated using the Almost Ideal demand system, which is popular in econometric estimation of food demand systems. An empirical application uses data on Australian meat consumption to evaluate generic advertising of meats. The results from using a theoretically correct money-metric measure of consumer welfare effects, taking account of cross-commodity effects of advertising and price changes, are compared with ad hoc approaches that some previous studies have proposed. In addition, the consumer welfare measures are combined with measures of producer benefits in order to compute private and social returns.