Six years ago, an economics journal published a seminal work that suggested that milk producers who pay "check-off" allocations may be better served spending that money on research, rather than on milk promotion and marketing. Now, Cornell University agricultural economists say that the mathematical model used in that study may be incorrect due to erroneous assumptions.

Most agricultural commodities have check-off programs used primarily for generic promotion to increase consumption. For example, for every 100 gallons of milk a farmer sells, a farmer pays a check-off fee that goes toward airing those popular "Got Milk" commercials. "Producers raise about $750 million a year for the check-off programs," according to Chanjin Chung; Cornell research associate in agricultural economics, and Harry M. Kaiser, Cornell professor of agricultural economics, authors of a new study.

In 1993 Michael Wohlgenant, an economist at the North Carolina State University, investigated the economic effects of research versus promotion. Before the 1993 study, researchers studied the efficacy of check-off programs, but those studies either focused on promotion or the financial efficacy of agricultural research (designed to ultimately lower production costs). Wohlgenant found that research on farm production generates better financial returns than advertising, assuming there is an equal efficiency in dollars spent on consumer promotion, farm research or promotion, and that leads to parallel shifts in retail demand and farm supply. Wohlgenant's conclusion should be interpreted with caution, says this new report.

"Erroneous assumptions can result in seriously misleading implications," says Kaiser. "We found that when there are pivotal shifts, producers would have better returns from promotion than from research."

Kaiser explains the difference between a parallel shift and a pivotal shift. A parallel shift implies that promotion has same effect on getting consumers to purchase a certain product, regardless of price level. A pivotal shift implies that consumers have a larger response to advertising a certain product at lower prices than at higher prices.

"For example, McDonalds would sell a lot more burgers with a special that reduces the price by 15 percent, compared to trying to sell burgers without a special. Advertising is one marketing tool. With lower prices, the advertisement sells more than without," Kaiser says.

The Wohlgenant findings are confined to a special case, explains Kaiser. "So, we relaxed one of the key assumptions, and the results completely changed." By substituting Wohlgenant's parallel shift in the model with Cornell's pivotal shift, and leaving everything else the same in the model, the results show that marketing and advertising have a larger impact on improving sales.

The research, "Distribution of Gains from Research and Promotion in Multi-Stage Production Systems: Further Results," by Chung and Kaiser appears in the May 1999 issue of the American Journal of Agricultural Economics.

"Consumer promotion benefits producers more than research activities," the researchers say in their report. The authors believe it is essential to reinvestigate Wohlgenant's findings under the assumption of pivotal shift before making any policy prescriptions: "The results, therefore, suggest an erroneous ... generalization about the nature of demand and supply shifts, which might lead to incorrect policy recommendations for the allocation of check-off funds."