Salomé Baslandze, Jeremy Greenwood, Ricardo Marto, and Sara Moreira
Working Paper 2023-15
September 2023

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The last decades have seen large improvements in digital advertising technology that allowed firms to better target specific consumer tastes. This research studies the relationship among digital advertising, the rise of varieties, and economic welfare. We develop a model of advertising and varieties where firms choose the intensity of digital ads directed at specific consumers as well as traditional ads that are undirected. The calibrated model shows that improvements in digital advertising have driven the rise in varieties over time. Empirical evidence is presented using detailed micro data on firms' products and advertising choices for the 1995–2015 period. Causal analysis using exogenous variation in consumers' differential access to the internet supports the suggested mechanism.

JEL classification: E13, L15, I31, M37, O14, O31

Key words: digital (directed) advertising, traditional (undirected) advertising, specialization, targeting, internet, varieties, welfare

The authors are grateful to Tom Hubbard, Ben F. Jones, Joseph Vavra, Galina Vereshchagina, and participants at seminars and conferences for their feedback. They would also like to thank Andrew Ahn, Kai Xiao (Sean) Chen, and Jiawei (Charon) Yang for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Salome Baslandze, Federal Reserve Bank of Atlanta; Jeremy Greenwood, University of Pennsylvania; Ricardo Marto, Federal Reserve Bank of St. Louis; or Sara Moreira, Northwestern University.

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