Econometric evidence of cross-market effects of generic dairy advertising

We estimate a dairy demand system to evaluate generic dairy advertising in the US, 1990-2005. Previous empirical studies of generic dairy advertising focus only on the market of the advertised good, ignoring potential spill-over and feedback effects. We specify an LA|AIDS model of dairy demand, which allows consistent estimation of cross-price and cross-advertising effects across dairy product markets, and is flexible and satisfies the axioms of consumer theory. We use the non-linear 3SLS estimator to address endogenous prices and serial correlation, and conduct bootstrapping to generate empirical distributions of elasticity estimates. Results suggest that cross-market effects are economically and statistically important. Thus, econometric dairy demand models that ignore cross-advertising and cross-price effects are mis-specified. Previous work that ignores substitution between fluid milk and cheese overstates producers' returns to generic advertising for either product. © 2010 Wiley Periodicals, Inc.