Incentives to Advertise and Product Differentiation

By: Hunnicutt, Lynn; Israelsen, L. Dwight


Hunnicutt, Lynn; Israelsen, L. Dwight, Incentives to Advertise and Product Differentiation, Journal of Agricultural and Resource Economics, Volume 28, Issue 3, December 2003, Pages 451-464

Recent court rulings question the ability of commodity groups to fund generic promotions through mandatory check-off programs. A model examining incentives to fund brand advertisements when both brand and generic advertising exist is presented. Brand advertising expands the market by attracting new consumers to the industry, and allows the advertising firm to take customers from rivals in the industry. Homogeneous products are advertised too little relative to the amount that maximizes total industry profits, and brandable products are advertised too much. The optimal check-off rate is derived, and the Dorfman-Steiner condition is shown to be a special case of this model.