Estimating Asymmetric Advertising Response: An Application to U.S. Nonalcoholic Beverage Demand

Abstract

We propose a regime-switching model that allows demand to respond asymmetrically to upward and downward advertising changes. With the introduction of a smooth transition function, the model features smooth rather than abrupt parameter changes between regimes. We apply the model to nonalcoholic beverage data in the United States for 1974 through 2005 to investigate asymmetric advertising response (AAR). Results indicate that a decrease in milk advertising had a more profound impact on milk demand than an increase did. An increase in milk advertising had no impact on milk demand but a decrease could have an own-advertising elasticity up to 0.049.

Keywords: asymmetric advertising response, demand system, negative asymmetry, nonalcoholic beverage demand, positive asymmetry, regime switching, smooth transition function

JEL Classification: Q11, M37, C32