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Generic Advertising: A Cost-Benefit Study

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In the agricultural economics literature, there are over 100 peer reviewed journal articles that try to measure the costs and benefits of generic advertising. Generic advertising is when producers work together at collective advertising, such as general advertising promoting the consumption of milk. Little research has looked at the effectiveness of promoting a specific food product in a monopolistically competitive industry. A monopolistically competitive industry is one where many firms are selling branded products that are slightly different.

In the April 2012 issue of the Journal of Agriculture and Resource Economics Mike Boland, John Crespi, Jena Silva and Tian Xia look at data from Sunsweet Prunes to measure the costs and benefits of firm level advertising in the article Measuring the Benefits to Advertising Under Monopolistic Competition. The authors highlight why the U.S. prune industry is a suitable industry to study monopolistic competition. They state that while demand has been declining, the number of sellers has increased. Prunes are also a differentiated product, which can be seen in prices, as the most expensive prunes are almost twice as costly as the cheapest prunes.

It is important to note that in monopolistically competitive industries, it is assumed that long run economic profits are zero because it is relatively easy for a new firm to enter the market resulting in dissipating profits. However, firms can make short-run profits by creating new products or marketing strategies. Their paper develops a framework of how firms in similar industries can use advertising to make economic profits in the short run; before new competitors enter the market or existing competitors increase their advertising. The authors also found that in the case of prunes, the benefits of advertising outweighed the costs. Their simulations found that Sunsweet Prunes made anywhere from $1.26 to $4.35 for every dollar spent on advertising.

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About this Entry

This page contains a single entry by Sadie Dietrich published on April 11, 2012 10:07 AM.

Conversations about Sweetners was the previous entry in this blog.

Opportunities in the Dairy Industry is the next entry in this blog.

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