Assessing Dairy Producers’ Surplus and Benefits from Brand Advertising

ObjectiveAdvertising is a crucial tool for increasing the consumption of health-enhancing products. Production firms seeking to enhance profit and income through increased sales often adopt advertising—either generic or branded—as a central strategy. The advertising budgets of major dairy producers reflect their focus on branding and branded advertising. Efforts to increase dairy consumption through advertising are driven by various market actors with diverse motivations. However, the continuation of both public (usually by public institutions) and branded (mainly by producers) advertising policies is deemed necessary. The sustainability of branded advertising relies on the level of benefits producers gain in comparison to other market participants—such as retailers or distributors—who do not bear the costs of advertising. Therefore, unlike most studies that focus on consumer benefits from increased consumption, this study aims to quantify the benefits and surplus generated for producers by branded advertising and to examine how their share of these benefits changes with the presence or absence of branded advertising. MethodologyTo examine the impact of branded advertising on raw milk producers at the farm level, a modified version of the model proposed by Zhang et al. (2002) is employed. Their model analyzes market conditions to determine when advertising benefits or harms producers. This study uses a two-stage bilateral monopoly model to explore scenarios in which firm-owned advertising may potentially harm producers due to dominant buyer power. A Cournot framework is adopted to compare scenarios with and without branded advertising at the retail level. This study focuses on both current and optimal branded advertising budgets for two dairy products: processed milk and cheese. Among dairy firms, Iran Dairy Industries Company holds a dominant position with a 50% market share, serving as the basis for market analysis using data from September 2022 to September 2023. The effects of branded advertising on producer benefits are estimated under three scenarios of brand advertising elasticity for milk demand, four price elasticity scenarios, and eleven advertising intensity index scenarios (including equilibrium in multilayered models, competitive vs. non-competitive markets, and open vs. closed economies). For cheese, two brand advertising elasticity scenarios, three price elasticity scenarios, and four advertising intensity index scenarios are considered. FindingsResults show that the quantity of branded processed milk supplied by the dominant firm significantly changes with variations in advertising and price elasticity of demand. In contrast, unbranded milk quantities also vary considerably, while the quantities of branded and unbranded cheese show minimal changes. Overall, producer benefits from retail-level advertising are highly sensitive to demand elasticity. For processed milk, increased demand elasticity leads to greater producer benefits, whereas for cheese, this relationship is diminishing. In total, optimal branded advertising by the dominant firm increases raw milk producers' benefits by 6.407% and 6.196% for processed milk and cheese, respectively. ConclusionOptimal branded advertising at the retail level for processed milk and cheese positively affects raw milk producers' welfare. Previous studies (e.g., Shahbazi, 2015) also highlighted the impact of generic dairy advertising on milk supply, prices, and farm-level producer surplus. Furthermore, the effects of branded food advertising on producers vary based on market conditions and advertising effectiveness. As noted by Zhang et al. (1999, 2002), changes in demand may potentially reduce producer benefits. In Iran's dairy sector, where a dominant firm prevails, producers benefit from branded advertising, providing a strong justification for the continuation of branding and advertising policies.