OPTIMAL GENERIC ADVERTISING IN AN IMPERFECTLY COMPETITIVE FOOD INDUSTRY WITH VARIABLE PROPORTIONS

This paper determines the impact of food industry market power on farmers' incentive to promote in a situation where funds for promotion are raised through a per-unit assessment on farm output and food industry technology is characterized by variable proportions. Specifically, building on earlier studies by Azzam and by Holloway, Muth's model is extended to consider the farm-level impacts of generic advertising when downstream firms possess oligopoly and/or oligopsony power and advertising expenditure is endogenous at the market level. Applying the model to the U.S. beef industry, we find that for plausible parameter values market power reduces farmers' incentive to promote. However, the disincentive is moderated by factor substitution, and effectively vanishes as the factor substitution elasticity approaches the retail demand elasticity. This suggests that the Dorfman-Steiner theorem, suitably modified to account for factor substitution, suffices to indicate optimal advertising intensity in the U.S. beef sector.