The Expansion of Product Varieties in the New Age of Advertising


The last decades have seen large improvements in advertising technology that allowed firms to better target specific consumers. The relationship between advertising, the rise of product varieties, and economic growth 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.