Beggar-Thy-Neighbor Advertising : Theory and Application to Generic Commodity Promotion Programs

Mandated generic commodity promotion programs funded by commodity taxes, called check-offs, are important and controversial. Previous studies of benefits, and legislated requirements for evaluation, have focused on the own-producer effects of promotion. They have disregarded the costs or benefits experienced by producers of commodities not covered by the program but affected by it either directly or because of induced price changes. In this paper, theoretical models are developed for a case where two producer groups each promote their own commodity, and the two commodities are closely related in consumption. In the likely case, promotion of each commodity has a positive own-commodity producer welfare effect and a negative cross-commodity producer welfare effect, and each producer group will spend less on promotion if they take effects on other producers into account than if they consider only the within-group welfare effects; accordingly, from a broader social perspective, commodity programs are likely to overspend on promotion. An application uses 1994 data on prices, consumption, and advertising expenditures on U.S. beef and pork to illustrate the effects of generic advertising of beef and pork, taking account of cross-commodity effects of advertising and price changes. We quantify the beggar-thy-neighbour non-cooperative outcome and the joint optimum, and discuss the policy implications of the comparison