Online News as a Lemon Market

Original author: Dhruv Sharma
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From the translator: “The Lemon Market” ( lemon - used car, amer. Decomp. ) - the name of the work of economist George Akerlof, devoted to information asymmetry, characterizing the situation when the seller knows more about the product than the buyer. Akerlof, Spence and Stiglitz for their research in the field of information asymmetry received the Nobel Prize in Economics in 2001.
Akerlof described the problem of quality uncertainty on the example of the used car market, which shows both good and bad cars. Since only the seller knows about the real quality of the car, the buyer cannot give her an adequately high price, respectively, as a maximum, he will offer the average. This means that the seller cannot get an adequate high price for his car and, as a result, will not put it on the market at all. However, the phenomenon has other interesting consequences. See here for more details .


The article considers the problem of news distribution within the framework of the lemon market paradigm proposed by George Akerlof in 1970. The definition of news as a mechanism that forms universal awareness, in contrast to their entertaining function, makes it possible to understand that instantaneous general awareness in the confusion and uncertainty of communication methods and life realities is unattainable. Considering the problem from this angle, we find a solution that allows traditional media to carry out their functions, focusing on the role of news validation, instead of producing them. The greatest added value that traditional news media can create is the verification of information for truth and quality assurance.

“It's hard to get the news from poetry, but every day people die because we miss it.”
William C. Williams


Measuring the quality of entertainment is quite simple and self-evident. Consumers instantly determine if the product is entertaining, and continue to pay attention to it if they find it amusing.

News providers strive to serve the individual's entertainment and information needs in one product at once. If the quality of the entertainment component of the news to the consumer is easy to evaluate, then with the assessment of the quality of the information component it is much more difficult.

The consumer is faced with the inability to determine whether the news is accurate or true, which corresponds to the situation of information asymmetry.

Despite the availability of an almost unlimited number of news sources and automatic search engines, the cost of finding the truth is too high. A person is bombarded with information all day, but despite the ease of use, only 28% of Internet resources are available to search engines (Barabasi, 2002). The Internet is growing exponentially; existing computing power cannot cover most of the network.

Since the media serve as a watchdog and controller in a democratic social order, the formation of the lemons market in relation to news is becoming a serious problem that needs to be studied.

It may seem that increased competition due to independent and unbiased bloggers could improve the quality of news, but in practice this is not always the case. Without the ability to evaluate the accuracy and quality of information, the online news market tends to become a lemons market.

Schleifer’s research of the news market shows that competition alone is not enough to guarantee the accuracy of the information communicated, and that competition not only “leads to low prices, but also leads to a general bias towards reader bias” (Shleifer and Mullainathan, 2005).

Schleifer believes that “a reader with access to all news sources can form an unbiased point of view” and that “reader heterogeneity is more important for media accuracy” (2005).

In fact, the problem of the cost of information retrieval has not been studied, since no reader has the time to study all news sources to form the ideal model of unbiased information.

The problem of assessing the validity of news quality is essentially the problem of the lemons market raised by Akerlof (Akerlof, 1970). The phenomenon of the lemon market also deals with “quality and uncertainty,” and the media market is a business in which “trust is important,” and, as Akerlof shows, “informal unsigned guarantees are prerequisites for trade and production,” and “where these guarantees are vague, business will suffer ”(1970).

The purpose of this article is to raise the question of the lemons market in relation to Internet news, since the quality of free information that has been posted on the Internet is “uncertain”. When product quality is not known, consumers are willing to pay for it, even assuming that it is unreliable. This forces sellers of good goods out of the market, because the buyer still cannot distinguish good from bad.

Akerlof showed the harmful effects of the lemons market using used cars in the 1970s. Then people could not get a decent price for their car and, as a result, refused to sell, leaving only “lemons” on the market, which were already traded as necessary. This happens with the market for any product whose quality is uncertain.

The same phenomenon was observed in the mortgage market and can be applied to the media industry, where the news is the product.

To determine the quality of news and newspapers

News as a system for people implies the following usefulness for them:
  • connect people and information;
  • provide marking (branding) of perceived truth;
  • help support democracy and its ideals;
  • satisfy people's need for cognition through the integrity of the narrative.

The integrity of the story itself has recently been criticized by Taleb, as it moves the reader towards unrealistic risk assessments in financial and other areas of life (Taleb, 2005). Newspapers in general tend to exaggerate or underestimate the risks an individual faces and are not sound safeguards in terms of risk management.

The quality of a news product is the perception of validity and truth among peer groups that consumers communicate with. Most news consumers want to know what is happening, what is important. Thus, the news serves as a caretaker, observer, a means of combating corruption and the exchange of true facts of interest to human communities in comparison with the declared values ​​and topics.

The existence of a strong free press is associated with lower levels of corruption in different countries (Brunettia & Wederb, 2003). In a study of media companies owned by the state — this is the case in 97% of the countries of the world — it was found that according to the “theory of public choice ... state ownership undermines political and economic freedom” (Schleifer, Djankov, Mcliesh & Menova, 2003) .

Defining news boundaries

As part of this work, the emphasis is on the non-entertaining composite news as a product. This is consistent with Schleifer’s definition that “the quality of [news] information is its accuracy. The more accurate the news, the more valuable its source to the consumer. Pressure from audiences and competitors is forcing news sources to deliver more accurate information. In the same way that the mechanisms of a market economy encourage car manufacturers to produce better quality cars ”(Shleifer, 2005).

Hamilton's book on the economics of news emphasizes the fact that news is aimed at quick consumption, it is an information product, and it has a network effect (Hamilton, 2003).

From Hamilton's point of view, delivery speed, accuracy, and relevance are desirable characteristics of news as a product.

Seen from the sidelines, the news is indeed a mechanism for creating “universal awareness” in a confused environment where quality and truth are uncertain.

In such a context, the work of Halpern and Moses on artificial intelligence and philosophy would be appropriate (Halpern etal, 1984). Halpern and other general knowledge researchers have found that it is impossible to guarantee the validity and truth of universal real-time awareness in practice. The maximum that an individual can reach here will be almost universal awareness (Halpern etal, 1994).

Given the complex nature of global awareness in a distributed and indefinite environment, Halpern and others conclude that time modeling is critical in achieving ultimate global awareness. In other words, if the consumer wants universal awareness, he must wait a sufficient amount of time until the news is verified. As Eugene O'Neill would say, instant and true knowledge is only a dream.

One of the side effects of the current situation in the news market is market segmentation for the following groups of people:
  • people who do not read the news;
  • people who read the news to interpret facts for their activities, for example, politicians, lobbyists, etc .;
  • people who read what they want to believe in and are aware of their choice.

I believe that segmentation exists because of the high cost of finding the truth.

Personally, I do not read a lot of news. If I'm interested in a topic, I study the entire field of necessary knowledge, get data from experts and draw my own conclusions. But for the majority of citizens who read the news, they are an invaluable source of information on the basis of which they build relationships with others, exchange opinions about “really important events”, and achieve general awareness.

The famous anthropologist Roy Wagner pointed out the pressing information problems that a person faces:
“Belief from the time of Aristotle to our day never worked as it should, and it has a strong effect on the persuader himself ... We live in a world created by unsuccessful persuasion, including everything that the world’s communications industry, media, Internet or Web, ubiquitous “touch” modes and schemes use the code words “information” or “communication” to try to describe what is actually happening.

This means that we live in a world of information-trick - half-truths of our lies and lies of half-truths - or what the CIA (or at least its critics) would call misinformation. I'm not joking, and why would I? Misinformation achieves a much greater ambiguous or ambivalent effect than persuasion.

She is at the same time more informative and communicative than any of her fashionable surrogates. It works according to the “leakage principle”. Partial truths flowed into the tales of a well-planned lie, and a planned lie resulted in a partial truth. This is motivated by goals and objectives that are not directly related either to faith or beliefs on the one hand, or to doubt and cynicism on the other. It offers denial on both sides. As Karl Kraus put it: “It's true either half or half.”

On the one hand, we are not convinced (that is, indifferent), on the other, we are persuaded, and the most difficult thing is in the middle ... Disinformation rules the world, it does this through “denial”. Everyone knows that any transaction, occupation, and especially the profession has its secrets, known to the initiates and unknown to others. ”(Wagner, 2000)

The latter applies to journalism.

Potential Solutions: New Business Model for News

Until now, innovation in news media has concerned either the transformation of traditional media into high-tech companies, which is unlikely, or the transition to a strategy for using niche hyperlocal markets.

A model that uses niches and differentiation / specialization has potential, but is difficult to relate to the problem of changing interest and taste. How does a consumer know which hyperlocal news they are interested in? When time is limited, and there is an active struggle for the user's attention , it is difficult for a hyperlocal site to maintain its value for him. Based on this, the option may work when the media is non-profit and will be supported by the community.

The solution we offer is aimed at larger, more established media, and is a new approach to solving the problem.

Traditional print sources such as the Washington Post have the foundation and reputation of organizations that verify and guarantee high quality information. The level of expertise available in the print media can be used to validate and authenticate incoming news, and there is no authority on the Internet for validating news.

One of the innovative solutions to the lemons market problem can be the creation of a reputation-based blogging space by traditional newspapers, where the news will be checked and validated before publication. This idea is consonant with the work of Yamagishi, who investigated the lemons market in the field of online trading, in which he found that the reputation system is useful in solving this problem (Yamagishi, 2002).

Yamagishi noted that online trading deals with “information asymmetry,” which “brings the market into a lemons market situation.” This is similar to the problem of consuming news. Yamagishi divides his reputation into two types: positive and negative. He found that the openness of e-commerce prevents a negative reputation and "develops a positive reputation as an effective way to limit the problem of lemons."

An important aspect of understanding that negative reputation is ineffective on the Internet is the ease of changing and creating a new face. Therefore, to combat the problem of lemons, “inclusion” methods are critical, which ensure the validation of a positive reputation.

According to Yamagishi, existing newspapers with a positive brand reputation are valuable as guarantors of a positive reputation in the open Internet news market.

A new form of existence for traditional newspapers may be a hybrid form of enterprise engaged in guaranteeing the quality of news and preserving the ideals of the industry.

Differentiated prices will be paid to news companies based on the quality of their screening, and not for the angle of the news or their sensationalism.

With this model, newspapers will specialize in industries according to their expertise and provide objective validation. To ensure true objectivity, the impact of advertising profits will need to be eliminated. Possibly, advertising revenue will be tied to content providers along with payments to authors. Intermediaries who select content based on data from quality assessments and after validation will be paid only for the quality of their selection.

A successful example of working with “cyber-lemons” as an “online intermediary” was the largest Chinese trading site C2C, which created a “trust assessment system that became an intermediary in assessing quality and reputation” (Pan, 2005).

In short, several eBay news sites specializing in different industries would help solve the lemons problem.

The newspaper industry must face the process of eliminating intermediaries in determining the content of news broadcasts. The previous model, based on the fact that the agenda is determined by several organizations existing through advertising, was paternalistic. With the destruction of the intermediary component, the obligation to determine what deserves the attention of people and what does not, falls on the shoulders of society. This issue should be best resolved through the education and fostering of civic and democratic ideals among young people.

About the author:Dhruv Sharma is an independent researcher in the areas of organizational behavior, risk management, artificial intelligence and systems engineering. A graduate of McIntire School at the University of Virginie, received a master's degree in systems engineering and a master's degree in organizational development from Marymount University.

Special thanks to George Akerlof for a discussion by e-mail about the topic and direction of searches.
This article is dedicated to Emma Brown, a great writer and journalist, and George Akerlof, a great economist.

The following sources were quoted

  • 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, AL (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, JY 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
  • 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, NN (2005) “THE OPIATES OF THE MIDDLE CLASSES” Retrieved from
  • Yamagishi, T. Masafumi, Matsusa. (2002) Improving the Lemons Market with a Reputation System: An Experimental Study of Internet Auctioning. Retrieved from Hokkaido University
  • Wagner, Roy (2000) “Our Very Own Cargo Cult”. Oceana

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