Does Branded Food Product Advertising Help or Hurt Farmers?
Zhang, Mingxia, Sexton, Richard J., Alston, Julian M., Journal of Agricultural and Resource Economics
This study investigates market conditions when food processor/handler brand advertising, whether undertaken by an investor-owned firm or by a cooperative, will benefit or harm farmers. Addressing this question provides insight into the policy issue of whether and when promotion funds intended to benefit farmers should be used in support of brand advertising. Analysis of a two-stage oligopoly-oligopsony model shows that advertising by an investor-owned firm is most likely to be harmful to farmers when it takes place in a relatively unconcentrated industry and when advertising is relatively more effective at creating brand market power than at increasing total demand.
Key words: advertising, brand, cooperative, farmer welfare, oligopoly, oligopsony
An important issue for various commodity promotion programs is how to treat processor/ handler brand advertising. In programs that include a handler assessment, should handlers be given credit toward their assessment for expenditures to advertise their own brands? Should program funds be used to subsidize advertising of handlers' brands? For example, the Florida Citrus Commission has used check-off funds to support advertising of well-known brands, the Almond Board of California has used various programs which offer marketers assessment credits for brand advertising expenditures, and Market Promotion Program (MPP) funds from the U.S. Government are used to support brand advertising abroad.
Advertising is an important structural dimension of the U.S. food industry. In a study of food manufacturing industries, Connor et al. estimated food and tobacco manufacturers advertised 3.5 times more intensively than the rest of manufacturing. Brand advertising may assume even greater importance in U.S. agriculture in light of the 2001 Supreme Court decision in the case of United States v. United Foods, Inc. The Court ruled that assessments on mushroom handlers to fund generic advertising represented an unconstitutional infringement on the commercial speech rights of the handlers. Indeed, the plaintiff handler, United Foods, argued that, absent a mandatory advertising program, it would be free to design advertising campaigns to differentiate its products. Although the full implications of the United Foods decision will not be known for some time, likely consequences are greater expenditures on brand advertising relative to generic advertising and the redesign of mandatory promotion programs to recognize (credit) money expended promoting a brand.
To date, little research has been conducted on brand advertising's impact on demand for the farm products used as inputs in the food industry, but available evidence suggests it may be at least as effective in this regard as generic advertising (Hall and Foik; Kaiser; Kinnucan and Fearon). However, shifting demand may not be sufficient for brand advertising to benefit farmers if it also creates or solidifies processor/handler oligopoly power. Noted commentators on the market structure of the food industry argue that extensive brand advertising has been a key source of market power in the sector (e.g., Connor et al; Sutton). Also, a number of econometric studies (e.g., Pagoulatos and Sorensen; Wills and Mueller) have found a positive correlation between an industry's price or profitability and its advertising-to-sales ratio.
For a given market supply curve for the basic agricultural product, producer welfare, as measured by producer surplus, is a monotonic function of the market output. If market power increases as a consequence of brand advertising, the advertising firm will, ceteris paribus, increase consumer price and reduce sales, thereby also reducing sales of the farm product and reducing farmer welfare. Thus, even if brand advertising is successful in shifting demand, it may be harmful to farmers.
An additional factor in analyzing the impact of branded food-product advertising on farmer welfare is that the leading advertiser in several industries is a producer-owned cooperative. …