CONTENTS

Optimal Temporal Policies in Fluid Milk Advertising

Editor's Notes

Distribution of Gains from Commodity Checkoff Programs:
Research vs. Promotion

Director’s Corner

Next Meeting

NEC-63 1999 Fall Meeting September 27-28, 1999 Ottawa, Canada What Can We Learn from How the U.S. and Canada Milk Promotion Boards Evaluate the Many Components of Their Programs?

Distribution of Gains from Commodity Checkoff Programs:
Research vs. Promotion

by Chanjin Chung and Harry M. Kaiser

In a recent article in the American Journal of Agricultural Economics, Wohlgenant examined the distributional effects of commodity checkoff funds used for research versus promotion. He concluded that research on farm production generates greater returns to producers than research on marketing service or consumer promotion. Wohlgenant’s finding has drawn important policy implications for the allocation of checkoff funds. This is of special significance to some producer groups (e.g., dairy, beef, and pork) who spend a large share of the checkoff funds on consumer promotion. Wohlgenant argued, “one reason more resources are not allocated to research is that legislation, enabling spending of producer checkoff funds, is limited to promotion and certain research activities. For example, the Beef Promotion and Research Act of 1986 limits research to studies relative to the effectiveness of market development and promotion efforts, studies relating to the nutritional value of beef and beef products, other related food science research, and new product development” (p. 650). Consequently, Wohlgenant suggested Congress should consider expanding the scope of activities to directly include funding of farm-level research activities. Wohlgenant’s conclusion is based on three assumptions: (1) farm and nonfarm inputs have a nonzero elasticity of substitution, (2) each checkoff activity is equally efficient (i.e., retail demand and farm supply curves are shifted by the same amount vertically), and (3) shifts in demand and supply are parallel.

We examined the sensitivity of Wohlgenant’s findings to the type of shifts in demand and supply. We reexamined his findings with the assumption of pivotal rather than parallel shifts. While a parallel shift in demand implies that consumer promotion results in a constant increase in sales at each level of price, a pivotal shift in demand implies that promotion effects are greater at low prices than at high prices. Similarly, a pivotal shift in supply implies that research generates greater cost reduction for marginal firms than for inframarginal firms. Several studies in the literature of marketing and agricultural economics have already indicated possibilities of pivotal shifts in demand (e.g., Kuehn; and Prasad and Ring) and supply (e.g., Lindner and Jarrett; Voon and Edwards; and Alston, Sexton, and Zhang) caused by consumer promotion and research activities, respectively. Therefore, it is important to reinvestigate Wohlgenant’s findings under the assumption of pivotal shift before making general policy prescriptions.

Wohlgenant applied his model to the U.S. beef and pork industries and found that producers should prefer farm production research to consumer promotion. Our model is also applied to the U.S. beef and pork industries under the same assumptions as Wohlgenant except that now a pivotal shift is used.

The conclusion of our research is that the relative profitability of research versus promotion is highly sensitive to the assumption of the nature of shifts in demand and supply. Therefore, Wohlgenant’s finding should be interpreted with caution. When there are pivotal shifts, producers garner a better return from promotion than from research.

Although Lindner and Jarrett discussed several cases where researchers could envision the nature of the supply shifts, we know of no study that actually estimates the types of shift directly from technology transfers and promotion activities.

Rose argued that, “.. it is unlikely that any knowledge of the shape of the supply curve, or the position at which the single estimate applies, will be available. The only realistic strategy is to assume that the supply shift is parallel” (p. 837). However, as we have shown in this paper, since the assumption on the type of shift is a key determinant of the optimal allocation of checkoff funds, it may not be appropriate to simply assume parallel shifts without having any knowledge regarding the shifts. The policy conclusions from research results relating to the distribution of gains from checkoff programs, therefore, should be made with caution until researchers are able to identify the nature of the shifts. Further research on identifying the nature of demand and supply shifts will significantly contribute to our understanding of the relative producer gains from research and promotions.

References:

Alston, J. M., and G. M. Scobie. “Distribution of Research Gains in Multistage Production Systems: Comment.” Amer. J. Agr. Econ. 65(May 1983):353-56.

Alston, J. M., R. J. Sexton, and M. Zhang. “The Impacts of Imperfect Competition on the Size and Distribution of Research Benefits.” Amer. J. Agr. Econ. 79(November 1997):1252-65.

Alston, J. M., and J. A. Chalfant. “The Silence of the Lambdas: A Test of the Almost Ideal and Rotterdam Models.” Amer. J. Agr. Econ. 75(May 1993):304-13.

Kuehn, A.A.“How Advertising Performance Depends on Other Marketing Factors.” Journal of Advertising Research 2(March 1962):2-10.

Lindner, R. J., and F. G. Jarrett. “Supply Shifts and the Size of Research Benefits.” Amer. J. Agr. Econ. 60(February 1978):48-58.

Prasad V. K. and L. W. Ring. “Measuring Sales Effects of Some Marketing Mix Variables and Their Interactions.” Journal of Marketing Research 13 (November 1976):391-96.

Rose, R. N. “Supply Shifts and the Size of Research Benefits: Comment.” Amer. J. Agr. Econ. 62(November 1980):834-44.

Voon, J. P., and G. W. Edwards. “The Calculation of Research Benefits with Linear and Nonlinear Specifications of Demand and Supply Functions.” Amer. J. Agr. Econ. 73(May 1991):415-419.

Wohlgenant, M. K. “Distribution of Gains from Research and Promotion in Multi-Stage Production Systems: The Case of the U.S. Beef and Pork Industries.” Amer. J. Agr. Econ. 75(August 1993):642-51.