Econometric Evidence of Cross-Market Effects of Generic Dairy Advertising Metin Cakir Department of Agricultural Economics, Purdue University, Indiana. E-mail: mcakir@purdue.edu Joseph V. Balagtas Department of Agricultural Economics, Purdue University, Indiana. E-mail: balagtas@purdue.edu ABSTRACT 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. r 2010 Wiley Periodicals, Inc. INTRODUCTION US dairy farmers and fluid milk processors spend approximately 350 million dollars annually on generic promotion programs. These programs, funded by a compulsory producer check-off, are designed to increase returns to producing milk and other dairy products, with an emphasis on demand enhancement. Similar check-offs exist for other commodities and in other countries, but the dairy check-off in the US is by far the largest. Accordingly, a large literature is dedicated to modeling and measuring the effects of generic dairy advertising. Schmit and Kaiser (2004) is a recent example, and is illustrative of the methodological approach typically adopted in this literature (among others, Blisard, Chandran, Blayney, & Allshouse, 1999; Kaiser, 1997, 1999; Kaiser & Chung, 2002; Liu & Forker, 1990). They estimated separate, ad hoc demand models for fluid milk and cheese, in which demand is specified as a function of own price, income, non-alcoholic beverage price, advertising expenditure, and demographics. They found statistically significant own-advertising elasticities of 0.040 and 0.013 for milk and cheese, respectively. Estimates such as these have been used subsequently in simulation analyses to evaluate the effects of advertising on prices, quantities, and welfare (see Ferrero, Boom, Kaiser, & Forker, 1996 for a detailed review of these studies). Almost all of these studies have found that generic advertising yields large net benefits for dairy farmers and milk processors. For example, Nicholson and Kaiser (2008) developed a system dynamics model of the US dairy industry that included 17 intermediate and final dairy products to measure the impacts of Agribusiness, Vol. 26 (1) 83–99 (2010) r r 2010 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/agr.20203 83