Market Failure: The Odd Economics of Free News
Part 2: Information Seeking Behavior of Consumers
The information age has changed consumer economic behaviors. In 1890, Alfred Marshall said economics is a study of humans in the ordinary business of life, “on the one side a study of wealth; and on the other, and more important side, a study of people. For character has been molded by every-day work, and the material resources which is thereby procured, more than by any other influence.”
Today, material resources are matched by information resources for well-being. PIP molds character, shaping what we believe and how we act on those beliefs. Consumers must sort through facts and overwhelming amounts of MDM to make decisions.
Our attention span is the finite resource, with the flood of information exceeding our ability to process it. Herbert Simon wrote “a wealth of information creates a poverty of attention” which may lead to information snacking, essentially junk food for the mind. People read junk information for the same reasons as eating junk food: it is inexpensive, easy to get, and provides instant gratification. It is also unhealthy and raises the question: how do people identify what to consume?
Identification of Consumable Information
Consumption matches supplier price and quality with consumer price and quality. This is simultaneously a simple process and a complex process, driven by many dynamics. This section examines how consumers identify what to consume. This is challenging as technology disrupts our worldview away from the direct personal impacts of local PIP to the tenuous impacts of global PIP, much of which is difficult for consumers to comprehend. There is simply too much for any one person to know. And when we have difficulty, we may resort to trusting groups as a modern form of tribalism.
Local PIP about nearby towns and cities have expanded to PIP about nations and the world. We consume and believe indirect experiences that are more digital than real. Global databases, operating systems, and networks form the core of this new world, delivered to the mobile device in our hand.
This is possible because information has unique properties. Consumption does not deplete PIP, storage is cheap and persistent, and dissemination is inexpensive, easy, and fast, thus lowering barriers to consumption.
The ease of creating and disseminating PIP makes it plentiful and accessible. But it creates problems of too much information, too many search results, and a mismatch of quality-expected versus quality-delivered.
Components of Qc
Economic research and psychology describe consumer quality, Qc, sometimes more accurately than we can for ourselves. Many of us do not have a formal Qc and have little awareness of its components. Our Qc is likely to be incomplete so we function with partial personal mental framework. The best a consumer can hope for is to satisfice. In most cases, that is good enough yet leaves consumers partially unsatisfied.
This is in marked contrast to a supplier which has resources and economic motivation to create both robust Qs and a supplier’s version of Qc. Thus, the supplier knows more about overall Q than does the consumer, creating tremendous consumer disadvantage in the marketplace.
A car example illustrates the consumer conundrum. “How do you size up vehicles across categories, built for different buyers, who may use them for entirely different purposes? The apples-to-oranges comparison is always excruciating, but what has become apparent is that the choice, now, may not be useful: In reality, sometimes you want an apple; other times you reach for the orange.”
Some may think subjective components are inferior. They are not. The customer wants what they want even when the subjective components of Qc overwhelm the objective. Logic rarely changes the mind when emotions run strong.
A consumer can crisply rate quantitative components for a car such as acceleration and fuel mileage. They may convert some qualitative components to a number such as smooth ride, seat comfort, and styling. More elusive components might not be articulated, thus not included, such as recency, brand beliefs, and cognitive bias. Yet they are still likely at play, lurking in the mind.
What about post-consumption quality assessment? With a car, we learn about quality by using it, the product cycle measured in months and years. Such learning is less clear with PIP which, unlike a car, changes rapidly with the whims of news cycles, leaving consumers to trust the source as a proxy for the quality of the products they deliver.
We intuitively know that information is not useful forever. Historical facts, like last Friday’s high temperature, no longer have value. With dynamic facts like a disease treatment, the new replaces the old. To make it even more difficult, facts change because definitions change, like whether Pluto is a planet or not.
There is a price to pay for keeping up. Arbesman acknowledges social sciences change faster than physical sciences because “if you are making measurements that have to do with people, things are a lot messier, because people respond to a lot of different things.” Sorting through changing information is taxing for our brain so we create shortcuts to make it easier.
Psychological Value of Information Consumption
Humans have developed strategies to minimize taxing our brains and still satisfice. While these strategies are beyond the scope of these articles, an illustrative selection provides some insight into how people take shortcuts while creating objective and subjective quality components in our personal Qc.
Filtering the volume of PIP becomes essential with the 24-hour news cycle and its fleeting news-of-the moment. For example, voters have difficulty constructing an enduring Qc. This is especially true of those who wait until the last minute to cast their ballot, weighing recency higher than the relevancy of months-old PIP, now forgotten. Consumers process high volumes of PIP, driven by the speed of technology and a supplier’s need to fill time with something, anything.
Tribalism can be very strong, with personal decisions more heavily weighted toward ego, group belonging,, and self-interest as a proxy for historically local views. Whether group norms make sense or not, straying from them has consequences: getting kicked out of the group or being denied membership. Social media influencers are a type of tribe leader and research supports the sensationalism and lower quality of their content. Yet many people follow them to maximize social rewards and minimize social costs. Tribes can be very effective at reducing personal search costs by pooling information, while putting quality at risk. This is because group identification leads to overconfident beliefs about group members regardless of member ability. Low ability members overestimate their ability and high ability members underestimate their ability, shifting influence from high ability to low ability members, a sort of lowest common denominator. Beyond tribalism, PIP can enable collective narcissism where the group holds unrealistic beliefs of greatness and perceives threats from other groups.
Subjective value of PIP is influenced by the Qc components. Views of money, time, or data given can all influence value perception. If you nudge people sufficiently, their subjectivity engages and they will behave as the supplier wishes. Michael O’Leary, CEO of Ryanair, is certain of this with low fares overcoming safety concerns, he says, “€9.99 fares will cure an awful lot of customer apprehension.”
Six biases have been found by Google researchers as core to decisions shortcuts.
1. Category heuristics — shortcuts or rules of thumb that aid us in making a quick and satisfactory decision. This includes reducing choices, simplifying, and ease of access.
2. Authority bias — altering opinions to match those we consider authoritative experts.
3. Social proof — copy other people’s behaviors in situations of uncertainty. This can be tribal through word of mouth or star ratings on products of popular choice and can be subconscious.
4. Power of now — humans want things now rather than the future. Planning takes energy and immediate gratification is powerful, driving demand for same day package delivery and continual instant news feeds.
5. Scarcity bias — rare things are more desirable than common things. Techniques are deadlines (order now), quantity limits (may not last), limited access (I get something you don’t).
6. Power of free — the demand for something priced at zero is much higher than just slightly above zero.
These six are built upon basic human behaviors, with roots in Maslow’s work on human needs. All of these shortcuts influence PIP consumption. Social proof and authority bias are especially interesting because of their contributions to tribalism. The combination of personal shortcuts and group dynamics is a powerful driver of the psychology of consumption.
Price to Pay for PIP
Similar to a company outsourcing work, the consumer pays others to gather PIP.  But unlike a company, the consumer takes greater risk by having no formal quality agreement with the supplier. In Stigler’s 1961 scenario, the local information about car price and quality was limited, making the purchase process fairly easy.
In contrast, today the purchase process can be difficult. We are overwhelmed with millions of web search results and the tyranny of choice sets in. We cannot make sense of millions of results, so we take the easy way out: click on one of the first few we see. Various studies — you can search for them — show about 90 percent of clicks are on the first page.
We may adapt our search strategy by avoiding search engines altogether. We revisit the same cable news, website, or social media site followed by more shortcuts, looking for familiar names and familiar topics. All trying to minimize the cost of search and maximizing the value of results through subjective control of our Qc, with economic impacts on both personal and society well-being.
Quality dispersion as a measure of ignorance
“Price dispersion is a manifestation — and, indeed, it is the measure — of ignorance in the market.” Now, with PIP price perceived as zero, I suggest quality dispersion is the primary measure of ignorance in the PIP market. Critically, while more searches improve knowledge of prices, more searches may not improve knowledge of quality. Creating definitions of Qs and Qc is hard. Consumers get information for which they have no background to comprehend. Satisficing can help lower cost by ending the search when a good enough result is found. Maximizing utility in a classical sense is seldom relevant.
Stigler’s paper also cites “the widely held view that inexperienced buyers pay higher prices in a market than do experienced buyers as the former have no accumulated knowledge of asking prices … they will pay higher prices on average.” Similarly, inexperienced consumers of PIP are at a marked disadvantage. They will consume low quality information, lacking the experience to distinguish high quality from low.
Forms of payment for PIP
Consumers are often clear about money and time yet less clear about the value of their data, mental health,, and the cost of regretted decisions. The precision from paying with money is lost. Nothing captures a single tally of cost for a consumer in their search for PIP. Herbert Simon said it well: “we aspire only to approximate truths; we are under no illusion that we can find a single simple formula, or even a moderately complex one, that captures the whole truth and nothing else.” The absence of a simple formula for PIP makes it difficult for the consumer to understand their consumption costs.
In particular, consumers have little sense of the value of data given or taken by suppliers. It can be about the person (name, gender, background), their behaviors (purchases, navigation), engagement (texts, social media, emails), and others. “Much of the news currently published online is simply not worth paying for. Some of it is hardly worth our fleeting attention, let alone hard-earned cash” yet we willingly pay with personal data. Facebook has built their multi-billion dollar annual business on the data generosity of its 2.8 billion users.
People may pay with their time but are less willing when they quantify how much time they spend on PIP, discovering the “negative consequence of monetizing leisure.” With a simple calculation of an average 142 minutes a day on social media at an average wage of about $30 an hour, the cost is $71 a day.
Media outlets have tried subscription models and pay walls with varying degrees of success. A Pew Research Center report also showed that willingness to pay for news PIP is low. When paying with money, only 16% of consumers pay for news PIP yet 44% will pay for entertainment PIP. Keeping current with PIP is difficult and consumers may pay more when it is supplied as entertainment, lowering the barrier to access much like a catalyst. Consumers willingly, perhaps eagerly, distribute PIP that takes advantage of the desire to be entertained. For suppliers, that distribution channel is free. This leads to important questions about economic winners and losers, as well as impacts on society benefit.
Economic surplus and societal benefit
Economists have developed a way to look at the winners and losers. Economic surplus is a measure of the total benefit to society, by both consumers and suppliers, from buying and selling things. It accounts for the net of all the good and bad impacts. This gets messy with PIP transaction payment forms of money, time, or data, combined with the tricky sense of economic well-being from subjective quality components.
Overall economic surplus, S, is the sum of consumer surplus Sc and supplier surplus Ss defined below. Both Sc and Ss can be positive. If one is negative, the other must be positive and large enough to balance the negative. If both are negative, S is negative:
S = Sc + Ss is positive when both Sc and Ss are positive
If Sc is negative, then S is positive when Ss > |Sc|
If Ss is negative, then S is positive when Sc > |Ss|
S is negative when both Sc and Ss are negative
Economic surplus also has subjective components, from the consumer and the supplier. The consumer has a maximum price they will pay. The supplier has a minimum price to accept. Looking at each:
Consumer surplus is when the price paid is lower than the highest price they are willing to pay. Paying less is a bargain, bringing a subjective sense of economic well-being to the consumer.
Pcp < Pcw where P is price, c is consumer, p is paid, w is willing-to-pay
Supplier surplus is when the price accepted is higher than lowest price they are willing to accept. Accepting more is profit, bringing a sense of economic well-being to the supplier.
Psa > Psw where P is price, s is supplier, a is accepted, w is willing-to-accept
If both are true then consumer and supplier win, an overall economic surplus exists, and a wide sense of economic well-being is created with the associated societal benefits. When this occurs:
If Pcp = Psa a transaction is made
If Pcw > (Pcp = Psa ) > Psw both Sc and Ss are positive and S is positive
A general sense of benefit is important for the current transaction and for the possible additional consumption or production resulting from feelings of economic well-being.
A price of zero, free news, complicates things. When PIP is delivered to the consumer at a perceived price of zero and the most they are willing to pay is zero, there is no bargain perceived by the consumer. They expect free and their expectations are simply met. Thus, there is zero consumer benefit and no consumer surplus.
When Pcw = Pcp = 0 then Sc = 0
Importantly, the consumer does not realize subjective benefits and the overall economic benefit is then only subject to supplier benefit. This means that society-wide economic surplus rests solely with suppliers. Further,
If Pcp = 0 then Psa = 0 directly from consumer to supplier
With PIP, the consumer is not directly paying money to the supplier. To make money, the supplier must sell through secondary payment systems such as advertising and consumer data such as media outlets operating without consumer subscriptions or paywalls.
But what if the consumer is willing to spend non-currency resources? The entire concept of surplus is moved from the objective (money) to the subjective components of Qc assuming the consumer perceives no value for time or data. And markets are hard to understand when the consumer components are subjective.
The consumer also pays a non-monetary but real cost for rejecting information that is factual and instead relying on MDM. Information rejection is a serious problem when scientific PIP meets general public comprehension. In the example of COVID-19, most people do not understand pandemic disease transmission and control. They can rely on factual expertise or rely on MDM and perhaps pay the cost of illness or death.
Suppliers invest to create the supplier version of Qc to know which subjective components they can exploit to drive non-monetary forms of payment. Suppliers will edge closer and closer to quality limits of Qc that would repel a consumer, much like they edge close to Pcw until consumers object and reduce consumption. And if a supplier of MDM causes illness or death, the costs are borne by the consumer, creating a moral hazard.
Determining Consumer Quality
Consumer detection of quality remains elusive, leaving the consumer vulnerable to MDM. A consumer’s consumption choices are bewildering, given that Qc uses many thought processes and PIP takes many forms. A consumer’s objective and subjective needs converge to a decision to consume or not. And there is no certainty that consumption leads to comprehension or satisfaction.
The inability to detect quality results in newly defined Masherg’s Law where bad information drives out good information. Unlike Gresham’s ‘bad’ copper coins driving higher value ‘good’ silver coins from the market, good PIP is not driven out. Rather it is drowned out by the flood of bad PIP overwhelming the relative scarcity of good PIP. Critically, with Masherg’s Law the consumer cannot tell the difference in quality. A consistent rigorous Qc is too hard for consumers to apply. And with price perceived to be zero, there is no economic incentive to tell good PIP from bad. Market failure is the result.
 Quoting from Alfred Marshall’s 1890 book Principles of Economics, adapted from Herbert Simon, Rational Decision-making in Business Organizations, Nobel Prize Memorial Lecture, Dec 8 1978, 343.
 Simon, Herbert, Designing Organizations for an Information-rich World, Carnegie-Mellon University, draft Sep 1 1969, 6.
 Unique information product properties include easy-to-copy, easy-to-share, easy-to-access, low storage cost, low distribution cost, inexpensive search, rapid growth rate, abundant low quality, non-destructive consumption, continual drop in processing costs (Moore’s Law), amenable to network effects (Metcalf’s Law), and near-instantaneous distribution.
 Satisfice: to end a search and accept an available option as satisfactory, not optimal.
 Croughton, Paul, Editor’s Letter, Robb Report, February 2021, 22.
 The Business Value of PIP Production will be explored later.
 Bounds of group norms, sense of fairness, and reciprocal actions are components of group membership and a sense of belonging. Self-signaling reinforces who I am: a hat logo, a hairstyle, a tattoo.
 Bonding among people in groups increases cooperation and joint payoffs. Unity is key. Ostrom, Elinor, Beyond Markets and States: Polycentric Governance of Complex Economic Systems, Nobel Prize Lecture, Dec 8 2009.
 Market mavens have more followers, post more often, have less readable posts, use less distinct words and more uppercase characters. From Harrigan, Paul et al, Identifying influencers on social media, International Journal on Information Management, Feb 2021.
 Kruger, J., & Dunning, D., Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments, Journal of Personality and Social Psychology, 77(6), 1121–1134.
Rennie, Alistair et al, Decoding Decisions: Making sense of the messy middle, Google Think, July 2020.
 Roets, A. et al, The Tyranny Of Choice: A Cross-Cultural Investigation Of Maximizing-Satisficing Effects On Well-Being,” Judgment And Decision Making. Volume 7, Issue 6. 689–704.
 Changes in quality are often hard to detect whereas changes in price are easy to detect. Product suppliers reduce size or substitute cheap ingredients rather than raise the price. Similarly, different suppliers offer PIP with vastly different qualities, such as sound bites omitting context and low-cost opinion substituting for facts.
 Dhir, Amandeep et al Online social media fatigue and psychological wellbeing — A study of compulsive use, fear of missing out, fatigue, anxiety and depression,” International Journal of Information Management, Vol. 40, Jun 2018.
 This is tragically illustrated by people accepting COVID-19 MDM who later get the illness and die, wishing they would have been vaccinated. Florida radio and Newsmax host who opposed Covid vaccine dies of Covid complications, NBC News, Aug 8 2021.
 Adapted from Herbert Simon, Rational Decision-making in Business Organizations, Nobel Prize Memorial Lecture, Dec 8 1978, 366.
 Serfing the web: The new rules of the “creator economy,” The Economist, May 8 2021.
 Salim, Saima, How much time do you spend on social media? Research says 142 minutes per day, Jan 4 2019.
 Stillman, Jessica, A Harvard Business School Professor’s Simple Trick to Stop Wasting Your Life, May 6 2021.
 World Economic Forum, report on a survey conducted in China, Germany, India, South Korea, the United Kingdom and the United States about their media consumption and payment habits and preferences. Apr 2 2020.
 For PIP they could be any of the six Google biases especially recency, tribal, and brand image.
 Normative economics explores value judgements, sometimes using opinion surveys and studies, essential for PIP suppliers.
Suppliers have an enormous advantage over consumers through detailed Qc models about consumers. Consumers generally have little awareness of personal Qc, lacking the means (money and computers), probably the motive (don’t care), and opportunity (no idea where to start even if motivated).
 Altering your behavior to shift costs to another party, such as your careless car damage when repair costs are paid by your insurance company. With PIP, morally the supplier bears no cost for your loss due to their faulty information. They shifted the cost to you.
 With both the choice and the satisfaction from that choice relating to an economic utility function.
 A modified anagram acknowledging Gresham’s Law, where bad money drives out good money. Think of the 1965 U.S. switch from silver dimes and quarter coins to plated nickel-copper coins. Same face value yet the silver coins were obviously more valuable and were hoarded, leaving the ‘bad’ copper coins in circulation.
 The flood results from cheap fast technology, low cost of opinions, legal protection of opinions, consumer’s preference for emotional content (true or not), and volume driven by the 24 hour news cycle.