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The Expansion of Product Varieties in the New Age of Advertising

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Abstract

The last decades have seen large improvements in advertising technology that allowed firms to target better specific consumers. The relationship between advertising, the rise of product varieties, and economic welfare is studied here. A model of advertising and product varieties is developed, where firms choose the intensity of digital ads directed at specific consumers as well traditional ads that are undirected. The calibrated model shows that improvements in digital advertising have driven the rise in product varieties over time. Causal empirical evidence, using detailed micro data on firms' products and advertising choices for the 1995-2015 period and exogenous variation in consumers' differential access to the internet, supports the suggested theoretical mechanism. In Review of Economic Dynamics, v. 50, October: 171-210.

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  • Salome Baslandze & Jeremy Greenwood & Ricardo Marto & Sara Moreira, 2023. "The Expansion of Product Varieties in the New Age of Advertising," Economie d'Avant Garde Research Reports 37, Economie d'Avant Garde.
    • Handle: RePEc:eag:rereps:37
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    References listed on IDEAS

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    1. David Argente & Salomé Baslandze & Douglas Hanley & Sara Moreira, 2020. "Patents to Products: Product Innovation and Firm Dynamics," FRB Atlanta Working Paper 2020-4a, Federal Reserve Bank of Atlanta.
    2. Hilary W. Hoynes & Diane Whitmore Schanzenbach, 2009. "Consumption Responses to In-Kind Transfers: Evidence from the Introduction of the Food Stamp Program," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 109-139, October.
    3. Maarten De Ridder, 2024. "Market Power and Innovation in the Intangible Economy," American Economic Review, American Economic Association, vol. 114(1), pages 199-251, January.
    4. Philippe Aghion & Antonin Bergeaud & Timo Boppart & Peter J Klenow & Huiyu Li, 2023. "A Theory of Falling Growth and Rising Rents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(6), pages 2675-2702.
    5. Avi Goldfarb, 2014. "What is Different About Online Advertising?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(2), pages 115-129, March.
    6. Baslandze, Salomé & Argente, David & Hanley, Douglas & Moreira, Sara, 2020. "Patents to Products: Product Innovation and Firm Dynamics," CEPR Discussion Papers 14692, C.E.P.R. Discussion Papers.
    7. David S. Evans, 2009. "The Online Advertising Industry: Economics, Evolution, and Privacy," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 37-60, Summer.
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    Cited by:

    1. Cavenaile, Laurent & Celik, Murat Alp & Roldan-Blanco, Pau & Tian, Xu, 2025. "Style over substance? Advertising, innovation, and endogenous market structure," Journal of Monetary Economics, Elsevier, vol. 149(C).
    2. Mathilde Aubouin & Lionel Ragot, 2024. "The Macroeconomics of Free Digital Services," Working Papers hal-04616676, HAL.
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    4. Guy Aridor & Yeon-Koo Che & Brett Hollenbeck & Maximilian Kaiser & Daniel McCarthy, 2024. "Evaluating the Impact of Privacy Regulation on E-Commerce Firms: Evidence from Apple’s App Tracking Transparency," CESifo Working Paper Series 10928, CESifo.
    5. Salomé Baslandze & Leo Liu & Elvira Sojli & Wing Wah Tham, 2025. "Foundational Processes and Growth," FRB Atlanta Working Paper 2025-01, Federal Reserve Bank of Atlanta.

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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