Examining producers' surplus of dairy brand advertising

Purpose: Advertising plays a crucial role in boosting the consumption of healthy products. Manufacturing companies aiming to enhance profits and revenue through increased sales leverage advertising, whether generic or brand, as a key strategy. An examination of the advertising budgets of large manufacturing companies, particularly those in the dairy product sector, underscores their focus on branding and brand advertising. Market actors employ various motivations in their efforts to increase the consumption of dairy products through advertising. The continuation of both generic advertising (primarily conducted by public institutions) and brand advertising (mainly carried out by manufacturers) is deemed essential. The sustainability of brand advertising relies on producers' profitability and their share compared to other stakeholders at different levels, such as retailers or distributors who do not contribute to the advertising costs of dairy products. Therefore, this study, unlike others focusing solely on consumer benefits from increased consumption, aims to calculate the benefits and producers' surplus resulting from brand advertising and the change in their share of benefits in the presence or absence of brand advertising.



Method: To investigate the impact of brand advertising on the benefits of raw milk producers at the farm level, this study utilizes an adjusted model based on Zheng et al. (2002) model. The model analyzes market conditions to determine when advertising benefits or harms producers. A two-stage monopoly model is employed to explore the effects of advertising by investor-owned firms on producers. The study incorporates dairy product brands (processed milk and cheese) in existing and optimal advertising modes. Among the companies producing dairy products, a major producer (Iran Milk Industry Company) with 50% market share is used as the basis for analysis. Various scenarios are considered, including brand advertising elasticity, self-price elasticity, and advertising intensity, to estimate the effects on milk producers' interests at the farm level.



Findings: The results reveal significant changes in the quantity of branded processed milk from the dominant company (Iran Milk Industry Company) in response to variations in brand advertising elasticity and price elasticity of demand. The amount of branded processed milk increases as demand elasticity rises, positively impacting producer profits. Conversely, the impact on unbranded processed milk and cheese varies with changes in price elasticity of demand. In summary, the change in profit for raw milk producers due to advertising at the retail level is heavily influenced by the elasticity of product demand, with a positive effect observed in the case of processed milk. Overall, optimal advertising at the retail level for processed milk and cheese by the dominant company leads to a notable increase in benefits for raw milk producers.



Conclusion: Based on the results, optimal brand advertising at the retail level for processed milk and cheese enhances the benefits of raw milk producers. Previous studies, such as Shahbazi's (2015), have highlighted the impact of generic advertising of dairy products on raw milk supply, prices, and producer surplus at the farm level. The effect of brand food product advertising on producers can vary based on market conditions and advertising effectiveness. Some studies, like Zhang et al. (1999 and 2002), suggest that advertising may alter demand, potentially reducing farmer benefits. In Iran, despite the presence of a dominant company in the dairy industry, raw milk producers benefit from brand advertising. Therefore, continuing the branding policy and brand advertising is recommended to support the dairy industry in Iran.