Measuring the Impacts of Generic Fluid Milk and Cheese Advertising: A Time-Varying Parameter Application

Previous constant-parameter demand models have estimated generic advertising elasticities for cheese to be below that for fluid milk. We relax this assumption, allowing for generic advertising response to vary over time. Cheese advertising elasticities were found below fluid milk up until the mid-1990s; average elasticities since have been similar. A benefit-cost ratio of the farmer-funded generic advertising program was estimated at $6.26:1 over the period of 1999-2001, indicating that generic advertising for fluid milk and cheese continues to be a viable and worthwhile program for milk producers. *The authors are research support specialist and professor, Department of Applied Economics and Management, Cornell University. Modeling the Effects of Generic Advertising on the Demand for Fluid Milk and Cheese: A Time-Varying Parameter Application Introduction Evaluation of generic commodity promotion programs is a necessary component of managing producer checkoff dollars to determine net benefits to producers. One component of such an evaluation requires the estimation of demand effects of the generic advertising programs. This paper addresses this component by estimating national retail demand relationships for fluid milk and cheese, incorporating generic advertising expenditures. The demand relationships are then combined with market-level supply relationships to simulate returns to producers of the generic advertising programs. We extend previous research in this area by adopting demand models that allow generic advertising response to vary over time. While time-varying models have been applied to fluid milk studies in New York City (Kinnucan, Chang, and Venkateswaran; Reberte, et al.; Chung and Kaiser) and to the fluid milk market in Ontario (Kinnucan and Venkateswaran), no applications have been made to the national U.S. programs for fluid milk and cheese. Previous models of national fluid milk and cheese demand incorporating generic advertising (e.g. Kaiser; Sun, Blisard, and Blaylock) have assumed a constant-parameter framework utilizing data spanning relatively long time periods; i.e., 15 to 25 years. It may be unreasonable to expect that a mean-response model is sufficient, given changes in market environments, population profiles, or eating behavior over a long time period. The use of such models may be especially problematic when used for more recent period market simulation purposes for which the mean-response is no longer applicable. The time-varying parameter