Dynamic optimal producer advertising and research investment decisions: The case of milk in Canada

Both generic advertising and R&D have become major investment activities in the Canadian dairy industry as a response to changes in consumption patterns and increases in international competitiveness in recent years. Producer groups have funded much of the generic agricultural advertising; however, government agencies have undertaken much of the R&D. Producer groups have a choice on investments in advertising and R&D. This study examines the dynamic optimal advertising and R&D decisions for the Canadian milk producer groups.;This study synthesizes these two streams of study in advertising and research in the applied and theoretical efforts within a single discussion and analysis and builds an optimal control model to determine the optimal time path of advertising and research investment, assuming advertising and research to be capital and functions of time. A decision maker's problem is set up in which the present value of the firm's discounted profit stream is maximized subject to difference equations defining the change in the state variables.;An empirical econometric model is specified to determine the optimal advertising and research investment for the Canadian supply-managed milk market. Two alternative scenarios are considered in this study to reflect the effects of advertising and research on fluid demand, industrial demand, and total milk supply by assuming that the industrial supply or the total milk supply is an exogenous variable. Results from both scenarios show that the optimal producers' advertising investments are higher than the actual investments for the entire study period, while the actual producers' research expenditure is appropriate. The comparison between the actual and the optimal policy can provide a learning tool for the dairy industry in that the study can illustrate what would have been realized during the periods under study.;This study also examines how Canadian dairy producers' should adjust advertising and research investment decisions due to the change in supply-managed policy. The results suggest that, under the assumption of complete trade liberalization, the Canadian milk producers should significantly increase investment in research, but may not increase investment in generic advertising. However, the results do not suggest that advertising investment should be zero.