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Abstract
The effect of advertising on market performance has been a
long-standing debate. Advertising that increases the dispersion of consumers’
valuations for advertised goods raises the market power of firms, while advertising
that decreases the dispersion of consumers’ valuations leads to narrower
price-cost margins and superior performance in markets for advertised goods.
Numerous challenges confound the empirical identification of advertising effects
on market performance. This paper proposes a simple method that relies
on the revealed preferences of firms participating in generic advertising programs.
Generic advertising programs provide a unique window through which
to observe advertising effects on market performance, because changes in the
dispersion of consumers’ valuations systematically redistributes rents among
firms according to observable characteristics on producer size. We examine
producer attitudes towards generic advertising in the “Beef. It’s What’s for
Dinner” campaign of the U.S. Beef Checkoff program and find the likelihood
a producer favors an expansion of the advertising program increases in operating
scale. This finding is consistent with advertising effects that have led to
a decrease in the dispersion of consumers’ valuations for beef products and a
commensurate increase in market performance.