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‘You Will:’ A Macroeconomic Analysis of Digital Advertising

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  • Jeremy Greenwood
  • Yueyuan Ma
  • Mehmet Yorukoglu

Abstract

An information-based model is developed where traditional and digital advertising finance the provision of free media goods and affect price competition. Digital advertising is directed toward consumers while traditional advertising is undirected. The equilibrium is suboptimal. Media goods are under provided with both types of advertising. Additionally, traditional advertising is excessive because it is undirected. The tax-cum-subsidy policy that overcomes these inefficiencies is characterized. The model is calibrated to the U.S. economy. Digital advertising increases welfare significantly and is disproportionately financed by better-off consumers. The welfare gain from the optimal policy is much smaller than the gain from digital advertising.

Suggested Citation

  • Jeremy Greenwood & Yueyuan Ma & Mehmet Yorukoglu, 2021. "‘You Will:’ A Macroeconomic Analysis of Digital Advertising," NBER Working Papers 28537, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28537
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    Cited by:

    1. Kim, Gueyon, 2022. "Trade-Induced Adoption of New Work," IZA Discussion Papers 15165, Institute of Labor Economics (IZA).
    2. Gueyon Kim, 2022. "Trade-Induced Adoption of New Work," Working Papers 2022-007, Human Capital and Economic Opportunity Working Group.

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    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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