Coherent Identifier About this item: 20.500.12592/6th02r

‘You Will:’ A Macroeconomic Analysis of Digital Advertising

4 March 2021

Summary

A model is developed where traditional and digital advertising finance the provision of free media goods and affect price competition. The economy is not efficient. Media goods are under provided. Additionally, there is too much advertising when ads cannot be perfectly directed toward potential buyers. The tax-cum-subsidy policy that over-comes these inefficiencies in an informationally-constrained economy is characterized. The model is calibrated to the U.S. economy. Digital advertising increases consumer welfare significantly and is disproportionately financed by better-off consumers. The welfare gain from the optimal tax-cum-subsidy policy is much smaller than the one realized by the introduction of digital advertising.

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Tags

industrial organization macroeconomics macroeconomic models economic fluctuations and growth market structure and firm performance development and growth innovation and r&d

Acknowledgements & Disclosure
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

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