Optimal Advertising with Traded Raw and Final Goods: The Case of Variable Proportions Technology

An optimal advertising investment rule is derived for a vertically related, competitive market with traded final and raw goods and a processing sector characterized by variable proportions technology and nonconstant returns to scale. An equilibrium displacement framework incorporating conditional factor demands is used to account for the elasticity of substitution between agricultural and nonagricultural inputs to the marketing channel. Simulation for the Canadian beef industry in the post-WTO environment demonstrates how optimal advertising intensity falls as export demand elasticities for beef and live cattle become more elastic. Results show the optimal advertising intensity ranges between 0.05% and 0.22% of farm-level market revenue.