CONTENTS

Changes in Advertising Elasticities Over Time

Table 1

Figure 1

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Changes in Advertising Elasticities Over Time

Todd M. Schmit and Harry M. Kaiser
Cornell University

Most economic models used to evaluate the effects of generic advertising programs over time measure the average impacts of various factors on demand. These constant-parameter models can be problematic when the time period covered is relatively long and the marketing environment has sufficiently changed over time. For example, some of our analyses of national dairy advertising have been based on data spanning more than 20 years. As such, the effect of generic fluid milk and cheese advertising was measured as an average over this lengthy period. A mean-response model of generic advertising may not accurately convey the current degree of advertising effectiveness, given changes in market environments, population profiles, and eating behavior over time. In addition, advertising messages have changed, conversion of state to nationally run programs has occurred, and additional producer groups (e.g. milk processors) have contributed to the national program since the inception of the generic advertising programs.

A more appropriate way to measure the impacts of advertising, given a long history of time series data, is to use a time-varying parameter model. These types of models measure how the impact of demand factors, including generic advertising, vary over time. In this issue of the NICPRE Quarterly, the results of a time-varying parameter model for the dairy industry are examined.

Because there are many factors that influence the demand for fluid milk besides advertising, the following variables were included as factors influencing per capita fluid milk demand: the Consumer Price Index (CPI) for fluid milk, the CPI for non-alcoholic beverages used as a proxy for fluid milk substitutes, per capita disposable income, the percentage of the U.S. population less than six years old, the percentage of the U.S. population that is African American, variables to capture seasonality in fluid milk demand, a trend variable to capture changes in consumer tastes towards fluid milk over time, expenditures on brand fluid milk advertising, and expenditures on generic fluid milk advertising. The following variables were included as factors influencing per capita cheese demand: the CPI for cheese, the CPI for meat used as a proxy for cheese substitutes, per capita disposable income, per capita food away from home (FAFH) expenditures, the percentage of the U.S. population that is Asian/Hispanic; the percentage of the U.S. population between 20 and 44 years old, variables to capture seasonality in cheese demand, a trend variable to capture changes in consumer tastes towards cheese over time, expenditures on brand cheese advertising, and expenditures on generic cheese advertising.

The model was estimated with national, quarterly data from 1975 through 2001. To account for the impact of inflation, all prices and income were deflated. Brand and generic fluid milk and cheese advertising expenditures were deflated by the Media Cost Index. Because advertising has a carry-over effect on demand, past advertising expenditures also were included in the model as explanatory variables using a distributed-lag structure.

Unlike most previously used constant-parameter models which measure the average impact each of the above factors has on milk and cheese demand, the time-varying parameter model measures each demand factor’s impact on a quarterly basis. Moreover, the model is able to identify what factors were most important to the variation of advertising response over time. This is advantageous since the model not only allows one to measure the magnitude of each factor on demand, but also how that magnitude has changed and what has impacted this change over time.

The relative impacts of variables affecting demand can be represented with what economists call “elasticities.” These measure the percentage change in per capita demand given a 1-percent change in one of the identified demand factors. Table 1 presents the estimated elasticity values for the primary demand factors for fluid milk and cheese averaged over the most recent five-year period. For example, the price elasticity of demand for fluid milk equal to -0.14 means that a one-percent increase in the real, inflation adjusted, fluid milk price decreases per capita fluid milk demand by 0.14 percent. While table 1 presents these elasticities as 5-year averages, discussion in the text and figures that follow display how selected elasticities have varied annually over time. Due to space constraints, the principal focus here is on the generic advertising elasticities for fluid milk and cheese.

Generic advertising was positive and significant for both fluid milk and cheese demand. The time-varying advertising elasticities show substantial variation over time, with both increasing considerably since the beginning of the sample period (figure 1). Since 1995, however, both fluid milk and cheese generic advertising elasticities have demonstrated modest decreases.

Both products show significant increases in advertising elasticities following the inception of national program in 1984, with each reaching their highest levels around 1995. Fluid milk generic advertising elasticities increased from 0.02 at the beginning of the sample period in 1992 to nearly 0.06 in 1995. Currently, the fluid milk generic advertising elasticity is around 0.04. Generic advertising elasticities for cheese ranged from 0.005 to 0.045 over the same time frame and are currently at levels very similar to that for fluid milk generic advertising. A similar increase in advertising response was not exhibited following the addition of advertising expenditures from the processor MILKPEP program in 1995; however, these expenditures are combined with the Dairy Program fluid milk expenditures in the economic model, expenditures that have been reduced somewhat as advertising dollars were shifted from fluid milk advertising to cheese advertising.

It is important to note that past constant-parameter advertising studies have consistently shown advertising elasticities for cheese demand below that for fluid milk demand. Looking at response levels over the entire sample period clearly exhibits this characteristic as well. However, since the mid-1990s fluid milk and cheese generic advertising elasticities have been very similar. In fact, since 1997, a one-percent increase in generic advertising for fluid milk resulted in an average 0.042 percent increase in per capita fluid milk demand, compared with an average elasticity for generic cheese advertising of 0.039 (table 1). Restricting one’s attention to a mean-response over time eliminates the ability to make this distinction.

The model used in this study is also able to identify how the included factors have impacted generic advertising effectiveness over time. These impacts are quantified with what are defined as generic advertising response elasticities. The advertising response elasticity measures the percentage change in the generic advertising elasticity given a one-percent change in the factor level. As such, the signs of the generic advertising response elasticities provide useful insights for product marketers in terms of adjusting target audiences to increase demand response to advertising.

To evaluate a more recent time period, advertising response elasticities were computed and averaged over the time period of 1997-2001. Price effects were negative for both milk and cheese advertising; however the generic advertising response elasticity for cheese was considerably higher than that for fluid milk. The negative signs indicate that advertising is more effective during periods of lower product prices. As such, coordinating advertising efforts with price promotions would be an effective strategy to increase overall advertising response.

Increasing income levels have increased the effectiveness of both fluid milk and cheese advertising, although the effect was nearly 40% higher for cheese. The generic advertising response elasticity for income was similar in magnitude to the price effect for cheese, but considerably higher for fluid milk. The large, positive signs indicate that designing advertising messages targeting middle- and high-income would be an effective strategy.

As consumers spend more on food away from home, generic cheese advertising elasticities are reduced. While the predominance of cheese disappearance occurs in the FAFH sector, nearly all generic cheese advertising is focused on at-home consumption. As such, it is reasonable to expect that as consumers spend more of their budget away from home, the current generic cheese advertising message becomes less effective. If per capita FAFH expenditures are expected to increase in the future, then direction of generic cheese advertising towards the away-from-home market may be appropriate.

Both age composition advertising response elasticities for fluid milk and cheese were large and positive. A positive demand relationship between per capita cheese consumption and the proportion of the population between 20 and 44 years of age indicates that this cohort group consumes more cheese per capita than those in the younger or older cohorts; the positive generic cheese advertising response elasticity indicates that this cohort is also more responsive to the generic advertising message. A similar relationship exists for the fluid milk category and proportion of the population under age six. It follows then that advertising strategies targeted towards these cohorts would be an effective approach to increase generic advertising response. That is, targeted messages to middle-aged consumers for cheese and to adults with young children (the implied decision makers for the youngest cohort) would be expected to increase per capita advertising response to these programs.

Finally, both race-related advertising response elasticities for fluid milk and cheese are of the same sign as their respective demand elasticities. That is, as the proportion of African Americans in the population increases, there is both a negative demand effect for fluid milk as well as decreased advertising response. Similarly, the positive demand impact of increases in the Asian/Hispanic population is reinforced with increases in advertising elasticities. From an advertising perspective for cheese, this is a “win-win” situation. The Asian/Hispanic population proportion has increased approximately 11% since 1997, and it appears that this segment of the population is more responsive to the generic advertising message.

The advertising response elasticities indicate changes in generic advertising elasticities for marginal (i.e., small) changes in the associated variables. However, the resulting effect on changes in the generic advertising elasticity depends on both the level of the response elasticity as well as the actual change in the level of these variables over time. To evaluate the relative contributions of changes in these market and demographic variables on recent changes in generic advertising elasiticities, we multiply the percentage changes in these variables over the time period of 1997-2001 by the associated response elasticity.

Looking at the generic advertising response elasticities in this framework indicates that decreases in the proportion of the population under age six and increases in per capita income have had the largest impacts on variation in advertising response for fluid milk over the last five years. Even though the age advertising response elasticity was positive, there was a negative contribution of the age cohort effect due to the fact that the proportion of the population in this cohort has decreased since 1997.

The effect of price changes over this time period on variation generic advertising elasticities for fluid milk was about one-half of that exhibited by the other two variables, and race effects (via changes in the proportion of the African American population) were minimal; the actual African American race impact was reduced given its relatively small change over the time period (i.e., around 2%). The combined negative contribution of the price, age, and race effects slightly outweigh the positive income contribution and reflects the modest reduction in the generic fluid milk advertising elasticities since 1997.

The largest contributors to the variation in generic cheese advertising response were due to increases in per capita income levels (positive) and per capita FAFH expenditures (negative), with the each factor substantively negating the effect of the other. That is, advertising gains from increases in real per capita income were largely offset by increases in per capita FAFH expenditures. Race, price, and middle-aged cohort effects were also sizable but well below those of the income and FAFH effects.

While the generic advertising response elasticities were relatively large for the price and age variables, the decomposition effects since 1997 were reduced by relatively small changes in these variables since 1997 (+4% for price, -4% for the proportion of the population age 20-44). Again, the combined negative contributions slightly outweigh the positive contributions, consistent with the modest decrease in generic cheese advertising elasticities since 1997.

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