Optimal generic advertising in an imperfectly competitive food industry with variable proportions*

This paper determines the impact of food industry market power on farmers' incentives 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 [Am. J. Agric. Econ. 80 (1998) 76] and Holloway [Am. J. Agric. Econ. 73 (1991) 979], Muth's [Oxford Econ. Papers 16 (1965) 221] 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 US beef industry, we find that for plausible parameter values market power reduces farmers' incentives 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-Steinertheorem, suitably modified to account for factor substitution, suffices to indicate optimal advertising intensity in the US beef sector. © 2003 Elsevier B.V. All rights reserved.