Modeling the demand for alcoholic beverages and advertising specifications

In this paper, the demand for beer, wine, spirits and soft drinks in Ontari o is modeled in two parts: an equation is specified to endogenize group exp enditures and a demand system is set up to allocate budgeted group expendit ures across types of beverages, Advertising is allowed to influence both th e level of group expenditures and its allocation. Three popular advertising specifications are compared using the J-test and the likelihood dominance criterion. Even though all three specifications fitted well according to st andard criteria, the calculated expenditure, price and advertising elastici ties were sensitive to the manner with which advertising is specified. This clearly highlights the need to rely on a sound criterion to identify a dom inant specification. From the identified dominant specification, we found t hat advertising has very subtle effects on expenditures on alcoholic bevera ges (group and individual beverages). Thus, advertising is not effective in enlarging markets and this suggests that firms (especially breweries) use advertising to compete in zero-sum market share games. From a public policy perspective, our results are comforting but future research should investi gate whether the neutral effect of advertising on aggregated expenditures h ide substantial offsetting changes in the drinking habits of individuals. ( C) 2000 Elsevier Science B.V. All rights reserved.