Review of Industrial Organization 20: 205–220, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Generic Advertising of Intermediate Goods: Theory
and Evidence on Free Riding
CRAIG A. DEPKEN, II
Department of Economics, University of Texas at Arlington, Arlington, Texas 76019-0479, U.S.A.
DAVID R. KAMERSCHEN and ARTHUR SNOW
Department of Economics, Terry College of Business, University of Georgia, Athens, Georgia
Abstract. We develop a model of generic advertising in the context of vertically dependent markets
wherein producers of an intermediate good ﬁnancially support, through voluntary contributions, a
generic advertising campaign aimed at consumers of a ﬁnal product. The Nash equilibrium is char-
acterized by free riding on the part of upstream ﬁrms because of the nature of generic advertising,
leading to its underprovision with respect to joint, industry-wide proﬁt maximization. We test the
model in the U.S. ﬂuid milk industry focusing on the effects of generic advertising on the intermediate
demand for milk, since dairy farmers support the generic advertising. Taking this approach, we ﬁnd
that generic advertising had a positive inﬂuence on farm-level demand for milk, but did not achieve
joint proﬁt maximization.
Key words: Commodity advertising, free-rider Nash equilibrium, milk checkoff.
JEL Classiﬁcations: L2, D7, Q13, H4.
Generic advertising is an increasingly prevalent form of promotion. Containing no
ﬁrm-speciﬁc information, generic advertising, aims to increase industry demand
without regard to distributional consequences.
This type of advertising is typically
ﬁnanced by producers of an intermediate good and directed towards consumers of
ﬁnal goods that incorporate the advertised input. Examples include many agricul-
tural commodities, plastic products, textile unions, and certiﬁed public accountants.
Previous empirical studies by Dewbre, Richardson and Baere (1987), Forker and
Liu (1989), Ward and Dixon (1989), Brown and Lee (1992), and Ding and Kin-
nucan (1996) have examined the effects of generic advertising in markets for ﬁnal
goods, but not in the corresponding markets for the intermediate goods whose pro-
ducers actually ﬁnance the campaign. Wohlgenant and Cary (1993) and Kinnucan
Ward et al. (1985) and Forker and Ward (1993) provide a conceptual discussion of generic