Measuring and Testing Advertising-Induced Rotation in the Demand Curve

Abstract

Advertising can rotate the demand curve if it changes the dispersion of consumers' valuations. We provide an elasticity form measure of the advertising-induced demand curve rotation in five demand models and test for its presence in the US non-alcoholic beverage market. The Almost Ideal Demand System (AIDS) model reveals that doubling advertising spending rotates the demand curves clockwise for milk, and coffee and tea with associated slope changes of 7% and 12%. Soft-drink advertising rotates its demand curve counterclockwise. Our policy suggestion is that milk and soft-drink firms time advertising to coincide with high- and low-price periods, respectively.

Keywords: advertising, demand curve rotation, non-alcoholic beverages, price-advertising interaction

JEL Classification: Q1, M3