‘You Will:’ a Macroeconomic Analysis of Digital Advertising

Abstract

An information-based model is developed where traditional and digital advertising finance the provision of free media goods and affect price competition. The economy is not efficient. Media goods are under provided. Additionally, there is excessive advertising when ads cannot be perfectly directed toward potential buyers. The tax-cum-subsidy policy that overcomes these inefficiencies in an informationally-constrained economy 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 tax-cum-subsidy policy is much smaller than the one realized by the introduction of digital advertising.