The Expansion of Varieties in the New Age of Advertising


The last decades have seen large improvements in advertising technology that allowed firms to target better specific consumers’s tastes. This research studies the relationship between advertising, the rise of varieties, and economic welfare. A model of advertising and 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 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.

Review of Economic Dynamics, Vol. 50, pp. 171-210