Advertising and U.S. Nonalcoholic Beverage Demand

Abstract

As a first effort at modeling nonalcoholic beverage demand in a systemwide framework that includes bottled water, this article examines the impact of advertising on the demand for nonalcoholic beverages in the United States. We employed an AIDS (almost ideal demand system) model of five jointly estimated equations that included advertising expenditures as explanatory variables to evaluate annual U.S. consumption of nonalcoholic beverages for 1974 through 2005. Results suggest that advertising increases demand for fluid milk, soft drinks, and coffee and tea, but not for juice or bottled water. Advertising spillover effects occur in over 50% of the cases considered and such effects can be substantial, particularly for advertising of soft drinks, and coffee and tea. We find that a large increase in the retail price of fluid milk, an increasing trend towards dining out, and positive spillover effect from soft-drink advertising made significant contributions to bottled water's success in recent years.

Keywords: advertising, demand, elasticity, nonalcoholic beverages

JEL Classification: Q11, M37