Market Failure: The Odd Economics of Free News

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Part 1: News as Public Information Products

For clarity, I define news to be public information products (PIP) which are perceived to be free by the consumer, delivered by traditional media or social media, and excluding private information governed by agreements or contracts which have an effective marketplace.

Public information products are oversimplifications and omissions, with too much information for consumers to process.[1] Therefore, the test of truth is also oversimplified to something like “I know it is true if it conforms with what I believe.”

Truth is a mental composite of objective facts and subjective beliefs.[2] Beliefs can be held so strongly that independently verifiable facts may not change beliefs. This distinction makes it possible for PIP to claim truth yet be factually false, such as “I believe the Earth is flat.” The power of beliefs to override facts means any supplier claim of a single truth is folly.

Historically, public information from our neighborhoods and towns affected our lives. Local news is still relevant but now competes with a near-instantaneous deluge of global news. Most global news is not actionable by the consumer but feeds emotions. It appeals to subjective criteria, to be novel,[3] sensational, outrageous, emotional, and addictive.

PIP is everywhere. Most of us think we get it free and have little sense of its quality. Americans’ trust in their news sources is lowest with social media (4%), then friends and family (14%), national news (18%), and local news (22%).[4] It is no wonder we get confused.

Consumers gain and lose by the PIP they believe. These gains and losses affect consumer status and social, personal, and financial well-being.[5] These beliefs filter into the conscious and subconscious in ways formalized by Simon’s bounded rationality, Tversky’s decision processes, and Maslow’s human needs, each representing broad categories of human information processing. This processing is complex, varying by person, time, circumstances, and experience for any market in which they seek a specific product.

Market failure occurs in conditions where the free market does not self-correct. PIP dynamics show a mismatch between supply and demand, irrationally perceived “free” content, tension between individual good and society good, unusual principal-agent interactions, and supplier-consumer information asymmetry. Each of these will be explored.

Classically, supply and demand are about quantity, which barely applies to PIP. There is too much inexpensive information saturating demand. Newly and significantly, supply and demand are about quality where questionable information is difficult to identify.

In any market, personal confusion and societal costs are subject to misinformation, disinformation, and malinformation (MDM).[6] From a consumer point-of-view, pernicious information is wrong and misleading regardless of its origin or intent.

MDM drives supplier and consumer behaviors for both price and quality. Consumers easily spot price differences and are driven to the equal-quality supplier with the lowest price. In contrast, consumers cannot easily spot differences in quality and consume from suppliers over the full spectrum, from honest to dishonest.

Where information is the product being produced and consumed, what happens when all PIP is perceived to be the same price, essentially free? Quality then drives our personal decisions about the PIP we consume. Worldwide searches for the “best” quality have long surpassed searches for “price” and the gap is increasing.[7]

Yet quality is often avoided in economics because it is hard to define with precision. Each consumer or supplier definition of quality includes many components of importance — what news outlet, who said it, how recent — with each component’s relationship to others, simple or complex.[8]

To express this succinctly, let a consumer or supplier definition of quality, Q, be a composite set of a number of n quality components c where

Q = {c1 + c2 + c3 + … cn} and components c are anything important whether static or transitory, objective or subjective, articulated or not; + represents a component’s simple or complex relationship to other components; and n is usually large

Supplier s of PIP has its own set of quality component members

Qs = {cs1 + cs2 + cs3 + … csn}

and consumer c different set of quality component members

Qc = {cc1 + cc2 + cc3 + … ccn}

The sets Qs and Qc must have sufficiently common members for a transaction to occur. Yet perfect alignment is improbable. The large number of quality components are nearly a guarantee of information asymmetry between suppliers and consumers.

In 1961 George Stigler wrote economists “assume that the consumer has a large laboratory, ready to deliver current information quickly and gratuitously”[9] to the consumer. Today the assumption is gone. Instead of a laboratory, consumers now have countless suppliers providing near-real-time information. Yet the search problem remains. With so much being produced, finding high quality information is difficult.

A well-functioning market corrects itself when consumers detect low quality before or soon after purchase, creating feedback to suppliers driving higher quality or lower prices. This does not happen with PIP.

The market fails due to an odd combination of a perceived endless supply at a perceived price of zero. This drives a market flooded with non-perceived low quality products. Without a consumer feedback loop on price and quality, the market does not correct and becomes deluged with more inexpensively produced PIP, with low quality undetectable by the consumer.

[1] The high volume of information creates another problem. Not knowing — then finding out — may lead to the perception that someone is hiding something, feeding conspiracy theories rather than PIP lost in sheer volume.

[2] This pragmatic definition differs from deep philosophical truth definition, which relies on epistemology.

[3] Media companies flip head over heels to be first to break a story and grab consumer attention.

[4] Mitchell, Amy et al Trust and accuracy of American news organizations, Pew Research Center, Jul 7 2016.

[5] Matthes, J. et al Too much to handle: Impact of mobile social networking sites on information overload, depressive symptoms, and well-being, Computers in Human Behavior, 105, 106217, 2020.

[6] Misinformation is false with no harm intended; disinformation is false with harm intended; malinformation is fact-based out-of-context with harm intended. See complete definitions at MDM | CISA.

[7] Google Trends, Worldwide, 2004–July 2020.

[8] Quality component examples include Qs1=conservative/liberal, Qs2=financial goals, Qs3=editorial process, Qs4=emotional, Qs5=story selection and Qc1=well-presented, Qc2=emotional, Qc3=make-me-think, Qc4=confirms-my-beliefs, Qc5=story selection.

[9] Stigler, George, The Economics of Information, The Journal of Political Economy, Vol. 69, №3. Jun 1961, 224.