A Macroeconomic Analysis of Digital Advertising

Online advertising accounts for about a quarter of all advertising spending today. Digital advertising provides two benefits for consumers. First, companies provide free media goods to consumers such as a large number and variety of applications provided by technology firms. Second, digital advertising stimulates price competition. The goal of this research project is to quantify the value of these free products together with the increased price competition for consumers, and compute welfare gains. The research incorporates differences in labor skill and consumer income levels. The project has broad policy implications for understanding the role of digital advertising in the economy for consumers with different socioeconomic backgrounds.

The project explores how digital advertising affects macroeconomic aggregates. The project builds on a variant of advertising model. The model allows for both traditional and digital advertising, the provision of free media goods, and differences in incomes across consumers. The project incorporates the complementarity between digital goods and leisure and distinguishes between skilled and unskilled labor. The developed model will be calibrated and simulated to match stylized facts for the U.S. economy. The welfare gain arising from digital advertising will be computed. These welfare gains will be broken down into the gain from free media goods and the gain from increased price competition. Different income groups will be considered in this assessment.