An econometric model is used to estimate the net relationship between changes in the farm‐level price of milk and changes in the retail prices of four major dairy products—fluid milk, butter, cheese, and ice cream. Results indicate that the farm‐retail price transmission process in the dairy sector is asymmetric. Retail dairy product prices adjust more rapidly and more fully to increases in the farm price of milk than to decreases. The role in pricing asymmetry of retail demand versus farm supply shifts is tested via a Chow‐type test. Asymmetry is tested using the Houck procedure for estimating nonreversible functions.
Permitting seasonal variation in the goodwill effect in measuring the impact of fluid milk advertising on milk sales in New York City improved the statistical significance of the estimating equation. The allocation of generic advertising dollars according to optimization rules during the period 1979–81 would have resulted in a 9 percent increase in returns to dairymen supplying the New York City market. Harmonic variables are used to account for seasonality, a Pascal distribution is used to account for the decay structure, and goodwill elasticities are estimated to indicate the impact of generic advertising on sales.
A transfer function was used to estimate the fluid milk demand equation of New York City. The consumption effect of a generic fluid milk advertising program in the city was found to be positive and statistically significant. The resulting higher blend price of milk was found to have a negligible effect on the subsequent supply of milk. Though being successful in generating positive returns on advertising it was found that a 35% reduction in the advertising expenditures would have been optimal in the marginal sense.Given the large investments at stake, the impact of generic milk advertising and promotion on demand is a key issue for the dairy-industry. The funding for national and state programs combined totals over $200 million annually. These funds are obtained from a mandatory assessment of 15¢ per hundredweight on all milk marketed for commercial use in the contiguous forty-eight states. Of the total assessment, at least 5¢ goes to national advertising and promotion programs and up to 10¢ goes to qualified local promotion programs. A stated purpose of the programs is to reduce milk surpluses by increasing the consumption of milk and dairy products.This study has three objectives jegarding the effectiveness of generic fluid milk advertising. The first objective is to determine whether advertising results in increased consumption of fluid milk. The second objective is to ascertain whether the benefits of advertising exceed the cost of the program. The final objective is to determine whether the allocation of funds for advertising is economically efficient. The
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