A Theory of Dynamic Product Awareness and Targeted Advertising

Technological advances in advertising enable firms to contact new customers faster and to better target those most likely to buy their products. To study the aggregate implications, we develop a framework of demand as a network, where heterogeneous consumers dynamically become "aware" of differentiated products. With their adver- tising choices, firms can affect the rate at which their networks expand ("contacting") and the probability with which they match with high valuation consumers ("targeting"). When calibrating the model to the advent of digital advertising in the United States, we find an increase in aggregate productivity due to improved consumer-firm match quality. Moreover, while both contacting and targeting intensified over this period, firms did not sufficiently increase their targeting investment relative to the social optimum.