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Thursday, June 01, 2006

Got Real California Raisins?

Hal Varian on advertising commodities such as raisins and milk:

Advertising Commodities Can Be Tricky, but It Does Pay Off. by Hal Varian, Economic Scene, NY Times: Economists classify advertising into two broad types: informational advertising and image advertising. Classified ads, yellow pages and search engine ads are examples of the first category; they provide specific information about products and services.

These are quite different from ads for, say, soft drinks. Such ads do not typically offer new information. Instead, they seek to convey a positive image of a product... If you drink the right brand of soda or beer, ... you'll have fun...

There is a third, lesser known type of ad called commodity advertising. These ads focus on generic products like agricultural commodities. Well-known examples are the "California Raisins," "Got Milk?" and "Real California Cheese" campaigns.

Four agricultural economists — Harry M. Kaiser, Julian M. Alston, John M. Crespi and Richard J. Sexton — have studied these efforts... There are two interesting features of commodity advertising..: first, they are unreasonably effective, and second, they are unreasonably difficult to maintain.

On the first point, the economists calculate that each dollar spent on advertising agricultural products ... yields $3 to $6 of additional revenue to producers. The "California Raisins" campaign was credited with increasing raisin sales 10 percent in the 1980's... [T]here are now over 60 active commodity marketing programs in California alone, involving spending of about $1 billion a year.

But despite their success, the programs can be difficult to maintain. The problem lies in aligning incentives. The producer of a branded product pays all the costs and reaps all the benefits of its advertising spending, leading it to a carefully considered decision about how much to spend.

By contrast, the benefits and costs of commodity advertising are spread unequally among many producers, making it tough to reach a collective decision about marketing levels.

A California almond producer benefits from almond marketing efforts whether or not the producer contributes to them. So it is tempting to take a free ride on the payments of others. Mandatory programs provide one solution to this problem. ... Not surprisingly, the growers who receive few benefits from the programs do not want to be forced to contribute.

In early 1980's one almond grower ... sued the almond marketing board and, in 1993, ... the Ninth Circuit ... found that mandatory advertising violated ... First Amendment rights of free speech and association. After that decision, dozens of challenges to mandated marketing programs arose ... there are still over 70 cases being litigated; ... But it now seems likely that commodity marketing programs will continue to exist in some form or other.

Professor Kaiser, Kent D. Messer, and William D. Schulze ... argue that this is a good thing since commodity marketing is often beneficial to consumers. Consider the snack industry. From 1970 to 2001, per capita soda consumption more than doubled, while milk consumption fell by more than two-thirds. Surely, a few million dollars to promote milk consumption can not be bad, given the billions spent by the soft drink industry. Compare a soda and a candy bar with a carton of milk and a handful of raisins: which would you rather your child chose as a snack?

Or look at the pharmaceutical industry. Drug companies spend billions to advertise their branded products while virtually nothing is spent to market generic drugs. .. this is part of the reason brand drugs cost three times what equivalent generics do.

It can be tricky to structure commodity marketing programs so that they overcome the free rider problem. But if this can be done, such programs may offer substantial benefits to both producers and consumers.

To the extent that the ads provide new and beneficial information to guide consumer choices, I agree, but inducing consumers to indulge in products like milk, beef, and cheese beyond moderate amounts through persuasive advertising (talking cows, singing raisins, etc.) is not necessarily welfare enhancing.

    Posted by on Thursday, June 1, 2006 at 12:01 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (3)


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