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Economics Webinar (2023-01)

Topic: Customer Acquisition, Rising Concentration and Productivity Growth Slowdown

Speaker: Shihan Shen, University of California, Los Angeles

Time: Monday, January 9, 10:00-11:30 a.m. Beijing time

Location: Zoom Online Conference Room

Abstract

The cost of marketing and advertising has declined enormously due to the advance of digital technologies. This paper studies the macroeconomic consequences of lower marketing cost, and finds that it is a critical driving force of several striking macroeconomic trends, including rising market concentration and productivity growth slowdown since the 1990s. I develop an endogenous growth model with product market search frictions. Firms invest in innovation and marketing to build customer base, which is a long-term asset. Then I exogenously feed in the observed large drop of marketing cost into the quantitative model and find that it accounts for 83% of the rise in market concentration, measured by the largest firm’s market share. Cheaper marketing generates a positive level effect and a negative growth effect on productivity. These two effects together explain around 1/3 of the decline in productivity growth rate and successfully captures its “first-rise-then-fall” pattern over time. Finally, I conduct a welfare analysis and find that firms tend to over-invest in marketing compared to the socially optimal allocation, which implies that welfare can be improved by a marketing tax.

Biography

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