Melika Liporace

A Model For The New News Market

The news market has changed. The reason? Those:

These sharing buttons mean that the choice of readers to share articles on social media has an effect on the visibility of news outlets. When news publishers rely on advertisement to earn revenues, the sharing decisions of news consumers thus determine the profits of news producers. This creates a new type of incentives for producers: gain visibility through shares.

In my job market paper, I wonder about the consequences of this new incentive. In particular, I question the business model relying on advertisement revenues by asking: how good can these ad-funded news outlets get? Well, unfortunately, not so good. This business model is intrinsically flawed, both because of the way producers incentives are shaped and because of the channeling role of consumers.

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Online news, and in particular free (ad-funded) news articles, are extremely prevalent in the media diet of news consumers. It is fundamental to understand whether such outlets can provide informative news. What do I do to solve this question then? I propose a simple simultaneous, one-shot game with producers on one side, and consumers on the other. Producers are paid-per-view, they maximize the number of consumers who see their article. An exogenous subset of consumers are reached by exactly one news article; those consumers are the ones deciding whether to share, hence responsible for the producers’ visibility. They share if they believe the news is likely to be true, which they judge from a private signal. If an article is shared, it spreads to other consumers through an exogenous network. When several articles co-exist in the network, they compete to reach consumers.

Why do I exclude any psychological bias or partisanship from my analysis? These forces are prevalent in the diffusion of online news; yet, they are not the only forces at play. This work actually underlines how ad-based business models can also create forces that are detrimental to the provision of quality news. In other words, online news outlets would not be reliable, even if all social media users were rational!

4 Things Nobody Tells You About Online News

This setup has two direct consequences: i) the producers’ incentives to invest in news quality is determined by the additional number of views true articles are expected to gather as compared to false articles; ii) the news quality is bounded by consumers’ private knowledge because this level of news quality suffices for the producer to be systematically shared. These two elements lay the foundation to understanding the 4 things about online news.

1. The market does not compensate for a lack of private knowledge

In this context, private knowledge is defined by i) the precision of consumers private signal; and ii) the amount of ex-ante uncertainty about the topic. Less precise private signal means that consumers are less able to distinguish false from true articles; the value of false news is therefore very close to that of true information, and so the producers have barely any incentive to invest in news quality. When the topic is more certain to begin with, it is more likely for the producer to publish an article that makes a lot of additional views by being true, and so the producer finds investment more attractive. It means that sharing buttons create distorted incentives: the market fails exactly when it is needed the most.

2. Competition can be detrimental to news quality

The presence of a competitor on the market has two opposite effects on a producer’s incentive to invest. On the one hand, the producer is pushed to invest more because it is harder to reach readers within the network; few shares do not allow to survive in a highly competitive environment. On the other hand, the producer finds investment less attractive because the maximal number of readers that can be reached is now smaller; a lot of shares to not suffice to get a large readership. Both of these forces are modulated by the netowrk density; competition helps only if the network is sufficiently dense.

3. News consumers are sometimes better off without online outlets

Expecting the only presence of news outlets to be welfare enhancing for consumers is a very weak requirement. Yet, it is not necessarily fulfilled. There are many aspects of consumer welfare to be considered. Entertainment, that is, the expected utility from sharing news, benefits from the presence of news outlets. However, consumers are not necessarily induced to take better decisions by reading online articles. Often, consumers are better off trusting their private signal rather than a news article; then news outlets are neutral to consumers’ welfare. Furthermore, upon reading a news article that contradicts their private signal, consumers might be discouraged to take an action that would have otherwise been beneficial to them; this makes the presence of online outlets detrimental to their welfare.

4. The timing of fact-checking matters

Fact-checking past articles in order to certify the quality of news outlets (as, for instance, The Trust Project) does not remove the bound placed on news quality by private knowledge. Flagging wrong articles before they are shared does. Flagging indeed increases the amount of private information. Interestingly, the effect of flagging is smaller in competitive markets. Actually, flagging can be seen a substitute for competition: any competitve outcome is reproducible through flagging and, if flagging occurs often enough, competition becomes detrimental.