Application of Multi-market Equilibrium Model on General Advertising Significance Model in Profit of Milk Industry in Iran

Dairy products, especially milk, play an important role in healthy food basket of Iranian households. The long-standing increase in the consumption of this food has been a policy of the government. In recent years, government efforts to increase per capita consumption of dairy products and milk have led to an increase in demand for these products; with the per capita consumption of milk in 2016 equals 27.1 liters. Studies indicate that price of milk does not have impressive impact on milk consumption. For example, Cyprus, with very high price for milk, is one of the leading countries in milk consumption. Therefore, it seems that other factors have contributed to increase of demand for milk in the countries. One of the factors is general advertising of milk that promotes milk consumption among households. Today, advertising is an essential element in introducing goods and products and serving the needs of human life. Advertising should be used to boost economic movement by identifying the product. The role of advertising can be examined in a chain of influence from firm level to market level for sales and product demands. Therefore, because of the milk consumption importance, governments, spend money on advertising in order to increase its consumption. This policy (increasing demand by general milk advertising) has been prevalent in the world for many years and has been the main task of governments, for example, in the United Kingdom in 2015 about 12.4 million pounds or in the United States between years of 2000 to 2001, an average of 25.1 million dollars annually been spent on general advertising of milk. This approach can also be applied to government policies in Iran.  Given that general advertising is costly, the key question is whether general advertising in milk industry can affect the demand for milk (from the consumer's point of view) and, as a result, the profit of milk industry (from the perspective of producers). Although the results of assessment about the effect of advertising on consumption and profits of firms producing basic goods, including milk, have been reported in other studies, but the reliability of estimates has not been studied. This is basically due to the unknown type of statistical distribution of the effect of advertising.  In this study, the effect of advertising is estimated by analyzing the statistical significance of general advertising and its reliability. Also, with the simultaneous review of the effect of general advertising on industry profits and retail demand in a multi-market equilibrium model that considers advertising effects from farm to retail, the results are more reliable. So, the Significance of model of general advertising on milk industry profit in a multi-market equilibrium is examined. The purpose of this study is to investigate the significant role of general advertisement on Iran’s milk retail demand and industry profits in a multi-market equilibrium in 2016. Results indicated that by increasing the price elasticity of demand for processed milk at retail level, the level of advertising significance statistically declined and by increasing in input prices for raw milk production at farm level (forage, straw, wheat, barley, etc.), in most own price elasticities scenarios of demand, the level of advertising significance statistically declined, but by increasing the optimal advertisement budget (advertising intensity index), the level of advertising significance statistically increases, but when the markets are considered as multi equilibrium, the interval of milk general advertising significances declines for the minimum and maximum advertising intensity indicator. However, the more the market moves towards non-competitiveness, the significance level of processed milk general advertising declines. Also, results show that the average of the F statistics in competitive multi- market of milk is 1.519 to 10.657. This value for the competitive multi- market of dairy is 3.032 3.692 and for the non-competitive market is 0.981-3.414. Namely, with a less competitive market, general advertising effect declines significantly. On average, in different scenarios of the input price at farm level, general advertising effect varies significantly from 2.937 to 3.414.  The mean of milk advertising significant level in all scenarios is 3.883. Therefore, in all considered scenarios, milk advertising has a significant effect on consumer demand and the profit of the milk industry.  The effect of processed milk general advertising at retail level on the price of raw milk at farm level shows that the effect of advertising on farm prices decreases with increasing price elasticity. Also, by increasing the index of optimal advertising intensity, the effect of advertising on farm prices also decreases. The more the market goes to non-competitive, the effect of general advertising on the price increases at farm level. The average advertising effectiveness (advertising budget) is found to be at farm level price of 0.009226. According to this study results, the effect of advertising on industry profits is significant enough to justify advertising programs. This issue is examined by considering the statistical distribution of the effect of advertising on industry profits as a function of the statistical distribution of the effect of advertising on consumption. The results showed that the F-statistic for examining the effect of advertising on industrial profits was equal to the F-statistic associated with the reduced form of advertising effect on product prices. While the size of the effect of advertising on profits increased with the effect of advertising on demand, there was no significant correlation between the effect of demand and the significant effect of profit. One of the most important results of this study is that the statistical significance of advertising in demand function is neither necessary nor sufficient for the statistical significance of the effect of advertising in the reduced forms of price and profit functions of the industry. Therefore, it is suggested that in the study of the effectiveness of variables, the effects of different levels of marketing, the assumption of the type of market are considered. Also, in order to increase the influence of general advertising on milk consumption, decision makers can implement polices to reduce the prices of inputs and increase the intensity of advertising. Also, policies that make the milk market more competitive (at various levels of marketing) can be beneficial.