Internet news as a market for news lemons

This article frames the problem of news dissemination as a problem of market lemons, analogous to the issue raised by George Akerlof in 1970. Framing news as a mechanism of vetting common knowledge as opposed to entertainment allows one to see that instant common knowledge in the byzantine and uncertain way in which humans communicate and live in is unattainable. Given this frame of the problem a potential solution is posited which allows traditional newspaper companies to serve and focus on the role of validating news rather than simply creating or capturing it. The most value added service that traditional news organizations can provide is validation of truth and quality assurance.

“It is hard to get the news from poems, but everyday, men die miserably for lack of what can be found there.” (William C. Williams)

Introduction

Gauging quality of entertainment is fairly simple and self-evident. Consumers know instantly whether a product is entertaining and consumers continue to pay attention if they find the material to be entertaining.

News providers tend to serve both an individual’s desire for entertainment and information in one product bundle. Although it is very easy for consumers to test the quality of the entertainment component of news it is much more difficult to gauge the information quality of news.

Consumers face the intangible dilemma of assessing whether news is accurate or true, which poses a problem of asymmetric information for consumers.

Despite the availability of virtually infinite potential news sources and automated search engines, the search costs of getting the truth are too high. Human beings are bombarded with information throughout the day and despite the ease of search engine technology only 28% of the internet is actually available for search (Barabasi, 2002). The internet is growing in content exponentially and current computing cannot search the majority of the internet.

The threat of news becoming a market for lemons is an important issue worth exploring as news serves to provide a gatekeeping and watchdog function in democracies.

Although it might appear that the advent of increased competition for news via independent and unbiased bloggers on the internet would improve news quality this may not be true in practice. Without a way to assess the accuracy and quality of the information the market of news on the internet tends toward a market for news lemons.

Shleifer’s research on the market for news shows that competition is not enough to ensure accurate news and that, ironically, competition results in “lower prices, but common slanting toward reader biases” (Shleifer and Mullainathan, 2005).

Shleifer posits that ‘a reader with access to all news sources could get an unbiased perspective’ and that ‘reader heterogeneity is more important for accuracy in media’ (2005).

That said, the issue of search costs of consumers has not been explored as in practical terms as no reader has time to read all news sources to form a perfect model of unbiased information.

The problem of assessing the validity of news quality is in essence the ‘market for lemons’ problem raised by Akerlof (Akerlof, 1970). The market for lemons phenomenon relates to ‘quality and uncertainty’ and news is clearly a business in which “‘trust’ is important” and, as Akerlof points out, “Informal unwritten guarantees are preconditions for trade and production” and “where these guarantees are indefinite, business will suffer” (1970).

The aim of this paper is raise the issue of the market for internet news lemons as the quality of free information served piping hot on the internet is ‘indefinite’. When the quality of a good is unknown consumers are willing to pay for it, assuming it is not reliable, and thus this drives sellers with a good product out of the market as the consumer is unable to determine high quality from low quality goods.

Akerlof showed the detrimental effect of markets for lemons using the case of used cars in the 1970s where people with good used cars could not obtain the price their car was worth and would not sell their cars, thus leaving the market full of lemons in a self-fulfilling prophecy of sorts. Similarly, any market for good where the quality of the product is uncertain tends to a market for lemons.

This phenomenon has been at play in the mortgage securities market and is no different for news as a product.

Towards a definition of news and newspaper quality

News as a system for humans provides the following affordances to humans:

  • connects people with information,
  • provides branding of perceived truth,
  • helps support democracy and its ideals, and
  • fulfills an entertainment component via narrative integrity.

The narrative integrity itself has recently been criticized by Taleb as it encourages readers to build unrealistic assessment of risk in financial and other aspects of daily life (Taleb, 2005). Newspapers in general tend to either exaggerate or under-represent risks faced by individuals and are not sound guardians from a risk management point of view.

Quality for a news product is a perception of validity and truth amongst peer groups that consumers communicate with. Most consumers of news want to know what is going on. What is big? News thus functions to provide roles of gatekeeping, watchdog, anti-corruption, and in general a sharing of true facts of interest to human communities in relation to purported values and themes.

The existence of a strong free press has been associated with lowered corruption across nations (Brunettia & Wederb, 2003). In a study of government ownership of the news media, which is the case in 97% of countries, it was found that per ‘public choice theory…government ownership undermines political and economic freedom” (Schleifer, Djankov, Mcliesh & Menova, 2003).

Scoping News

For the scope of this work the emphasis will be on the non-entertainment quality aspects of news as a product. This is consistent with Shleifer’s definition that the ‘quality of [news] information is its accuracy. The more accurate the news, the more valuable is its source to the consumer. Pressure from audiences and rivals force news outlets to seek and deliver more accurate information, just as market forces motivate auto-makers to produce better cars’ (Shleifer, 2005).

Hamilton’s book on the economics of news highlights the fact that news is meant for rapid commoditization, it is information good and is a product of network effects (Hamilton, 2003). Per Hamilton’s point, speed of delivery, accuracy, and relevancy seem to be desirable characteristics of news as a product (2003).

If we step back and look at this, news is really a mechanism of generating ‘common knowledge’ within a byzantine environment where quality and truth are uncertain.

Taking this perspective one can see that the work in artificial intelligence and philosophy conducted by Halpern and Moses is relevant in this context (Halpern etal, 1984). Halpern and other students of common knowledge find that in practice it is impossible to guarantee reliable and true common knowledge in real time. The closest one can get to is almost common knowledge (Halpern etal, 1994).

Given the complex nature of the problem of common knowledge in a distributed uncertain environment Halpern et al point out that the modeling of time is critical in achieving eventual common knowledge. One way to look at this is, given that a consumer wants common knowledge, they should wait a sufficient time until a news story can be vetted. The expectation of instant and true knowledge is a pipe dream, as Eugene O’Neil would say.

One side effect of the current market equilibrium for news is the segmentation of the market for news into the following groups of people:

  1. people who don’t read the news,
  2. people who the read news to interpret facts to suit agendas i.e. politicians, lobbyists etc, and
  3. people who read what they want to believe and are aware of it.

I believe this segmentation exists due to high search costs for the truth.

I personally don’t read the news much at all. If I am interested in a topic I research the field, get input from experts, and make my own inferences. I of course do not engage much in casual conversation. For the majority of citizens who do, news is an invaluable source to relate with others and share experiences of ‘true events’ and common knowledge.

Noted anthropologist Roy Wagner has pointed out the pervasive problem of information which humans grapple with:

“Persuasion, from the days of Aristotle onwards, never works as it is intended to and has its greatest effect on the persuaders … To the extent that the vast, worldwide communications industry, the media, the internet or Web, the ubiquitous ‘sensory’ modes and guidance-circuitries use ‘information’ or ‘communication’ as code words for what is really going on, we live in a world that is actually created by a failure of persuasion.

“This means that we live in a world of information-stealth – the half truths of our lies and the lies of half truth  – or what the CIA, or at least its critics, would call disinformation. I wouldn’t be kidding you, now would I? Disinformation has a far more ambiguous or ambivalent effect than persuasion ever could have and is both more informative and communicative than its buzz-word surrogates. It works on a ‘leakage’ principle, partial truths leaked out in the telling of deliberate lies and deliberate lies leaked in the telling of partial truths. It is motivated by goals and objectives that have nothing directly to do with either belief or conviction on one hand or doubt and cynicism on the other; it offers deniability with both hands. ‘It is either half true,’ as the Viennese aphorist Karl Krauss said of the aphorism or ‘one and a half times true’.

“We are unconvinced (e.g. apathetic) on one hand, and overconvinced on the other, and the middle ground is the most contested of all … Disinformation rules the world, and it does so through ‘deniability’. We know for a fact that every single trade, occupation, and especially profession has its secrets, known to its initiates and unknown to others.” (Wagner, 2000)

The last piece applies to journalists as well.

Potential solutions: a new business model for news

To date innovation in news has been focused on either transforming traditional media into high tech companies, which is unlikely, and the adoption of the market niche strategy of hyperlocal news.

The model of niche and differentiation/specialization has potential but is perplexed with the issue of changing interest and taste. How does one know which hyperlocal news is of interest? With limited time and highly contested attention spans hyperlocal news is a difficult to maintain proposition. That said, given non-profit and community support it can work as a niche solution.

The solution we propose here is targeted to larger well established news players and is a novel approach to the problem.

Traditional print sources like the Washington post etc. have a platform and reputation for checking and ensuring high quality information. The expertise that existing print media companies have can be used to focus on validation and authentication of breaking news stories, as on the internet there is no authority for the validity of news.

One innovative solution to the market of news lemons problem might be for traditional news papers to create reputation-based blogging spaces where stories are tested and validated before publication. This is consistent with the work of Yamagishi who studied the market-for-lemons problem in online trading and found an online reputation system to be a useful solution to the problem (Yamagishi, 2002).

Yamagishi noted that online trading results in “information asymmetry” which “drives the … market into a lemons market” (2002). This is analogous to the problem of news consumption.  Yamagishi’s analysis segments reputation into 2 forms: positive and negative reputation. Yamagishi finds the openness of internet trading precludes negative reputation and  “promotes positive reputation as an effective means for curtailing the lemons problem” (2002).

An important aspect of understanding why negative reputation is not effective on the internet is that it is too easy to switch and create new identities. Thus methods of “inclusion” which validate positive reputation are critical to combating the lemons problem (2002).

Per Yamagishi’s suggestion, existing newspapers with positive brand reputations have value as providers of positive reputation in an open market of internet news.

An enterprise devoted to assuring quality of the news could be a new hybrid form of existence for traditional newspapers in which the goals of the news system is preserved.

The price differential paid to the news companies would be based on their quality of checking and not on slant of the news or sensational quality of it.

Under this model papers would specialize in news domains with expertise and offer objective validation stories. For true objectivity the influence of advertising profit would need to be removed. Perhaps the advertising revenue would accrue to content providers who provided the stories along with advertisements which underwrite the authors. The news intermediaries who select the stories based on quality and validation would be paid only for quality assurance.

A successful example of dealing with ‘cyber lemons’ was that of an ‘online intermediary’ used by China’s largest online consumer-to-consumer trading site, which built a “credit evaluation system to serve as a quality-intermediary and reputation” (Pan, 2005).

In short, several eBays for news, specializing in different news domains, would serve to mitigate the lemons problem.

The newspaper industry must face the disintermediation of its power to dictate the news agenda. The notion that a few, supported by commercial advertising, would decide what was newsworthy was paternalistic and with the disintermediation of this component the responsibility of what to pay attention to falls on society. This issue itself is best tackled through education and the fostering of civic and democratic ideals in youth.

Dhruv Sharma is an independent scholar in the fields of organization behavior, risk management, artificial intelligence, and systems engineering. A graduate of the McIntire School at the University of Virginie, he holds a Masters in Systems Engineering and a Masters in Organizational Development from Marymount University.

Special thanks to George Akerlof for email discussion of the idea and also guidance of areas to research and focus.

This article is dedicated to Emma Brown, a greater writer and journalist and George Akerlof, the great economist.

Citations:

  • Akerlof, GA. (1970) The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500
  • Barabási, A.L. (2002) Linked: The New Science of Networks, Perseus, Cambridge
  • Brunettia, Aymo & Wederb, Beatrice (2003) A free press is bad news for corruption. Journal of Public Economics 87 (2003) 1801–1824
  • Hamilton, James T., (2003), All the News That’s Fit to Sell. Princeton, NJ: Princeton University Press
  • Halpern,J.Y. and Moses,Y. (1984). Knowledge and common knowledge in a distributed environment. Journal of the ACM, 37(3):549–587, 1990. A preliminary version appeared in Proc. 3rd ACM Symposium on Principles of Distributed Computing
  • Halpern,J.; Fagin, R; Moses,Y. and Vardi,MY (1994). Common knowledge revisited. Theoretical aspects of rationality. Proceedings 6th Conference. Retrieved from http://www.cs.cornell.edu/home/halpern/papers/ck_revisited.pdf
  • Schleifer, A. Djankov, S., Mcliesh, C. Menova, T. (2003) WHO OWNS THE MEDIA? Journal of Law and Economics. vol. XLVI
  • Shleifer, Andrei & Mullainathan, S. (2005) The Market for News. The American Economic Review
  • Taleb, N.N. (2005) “THE OPIATES OF THE MIDDLE CLASSES” Retrieved from http://www.edge.org/3rd_culture/taleb05/taleb05_index.html
  • Yamagishi, T. Masafumi, Matsusa. (2002) Improving the Lemons Market with a Reputation System: An Experimental Study of Internet Auctioning. Retrieved from http://joi.ito.com/archives/papers/Yamagishi_ASQ1.pdf Hokkaido University
  • Wagner, Roy (2000) “Our Very Own Cargo Cult”. Oceana
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4 thoughts on “Internet news as a market for news lemons

  1. william perrin

    I studied economics at university. It isn’t clear that lemon theory is really appropriate in the news market.

    The most commerically successful news in the UK (and i suspect the USA) is tabloid ‘news’. Much of the content of the tabloids would be described by economists as lemons. The papers facing the most conspicuous economic problems are ‘non lemons’ eg the Independent, WSJ etc. To elaborate this – people seem to like buying news lemons – high quality, truthfulness etc is not an attribute they value using conventional micro economic signals. Personally, i don’t think this is great for society but it refelcts an underlying ‘market failure’. This behaviour poses problems for incentives in the micro markets the author suggests.

    At the heart of this paradox is the public good nature of unbiased news. Such news has many charactersitics of education goods – the benefit is often not appreciated ex ante so demand and price and thus supply are depressed below socially optimal levels, requiring government intervention to raise production and stimulate consumption – eg in the UK the BBC and extensive regulation of TV news for impartiality. In education governments make consumption mandatory and either produce themselves or subsidise production. The unusual demoractic value of news goods means of course that such a response to market failure would be inappropriate.

    Developing micro markets – eg ebays as the author suggests – does not as far as i can see tackle the public good problem and therefore won’t hit the lemon problem which to my mind which is subservient.

    The author’s own description of his atypical news consumption is indicative:

    ‘I personally don’t read the news much at all. If I am interested in a topic I research the field, get input from experts, and make my own inferences. I of course do not engage much in casual conversation. For the majority of citizens who do, news is an invaluable source to relate with others and share experiences of ‘true events’ and common knowledge.’

    Reply
  2. Ian

    “When the quality of a good is unknown consumers are willing to pay for it, assuming it is not reliable…”

    Surely you mean “unwilling”? If not, what’s the problem?

    Reply
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