The Economics of Algorithmic Curation in News and Media

In previous decades, we actively picked what we wanted to read or watch.  Today, thanks to short-form streaming digital media, such as TikTok, YouTube Shorts, or Instagram Reels, we can scroll endlessly from video clip to video clip.  We no longer actively select as much media - it is delivered to us by algorithm.  These digital codes filter through tremendous volumes of content and send us videos, songs, graphics, and articles similar to those that we have already viewed.  Research on how algorithms affect markets (our production and consumption decisions) is explored in the relatively new field of Algorithm Economics.

History of Social Media Algorithms

The modern social media algorithm emerged in 2006, when Facebook evolved to allow for continuous scrolling of one’s feed.  This simplest algorithm showed users posts in reverse chronological order, beginning with the most recent.  However, users complained that they were quickly inundated with posts that seemed irrelevant to them.  The next year, Facebook debuted an improved algorithm that used modern variables, such as the amount of user interactions with certain types of posts.  If a user interacted more frequently with posts about news, the algorithm would increase the number of news posts in the user’s feed.  Posts that users liked, shared, or commented on would result in the algorithm showing more similar posts.  

Within a decade, most social media sites were using algorithms to allow for continuous scrolling.  While this has increased the amount of media available to consumers, it has raised questions about social media addiction, which is a subset of digital addiction overall (including smartphone use, video gaming, and Internet browsing).  Having an infinite ability to scroll and browse has been blamed with distracting students and workers, potentially sapping economic productivity.

Economics of Algorithms

If the algorithm dictates what we see on social media, sellers have a tremendous incentive to ensure that the algorithm favors them.  Nowadays, sellers are highly aware of these algorithms and thus work to use them to their advantage.  While some algorithm manipulation can occur naturally, with company users interacting heavily with posts and other social media users online, much of it is paid, with companies paying social media companies for advertising space.

Appealing to the Masses

The shift of consumers’ focus to social media has affected how brands advertise.  Traditional advertisements, such as television commercials, may no longer have as much impact.  Even well-crafted images that attract views on social media may be insufficient.  Instead, sellers are using influencers to appeal to the algorithms.  They research what type of content is most popular with users, the best times of day to post, and which strategies best attract clicks and views.  

To receive maximum user engagement, sellers try to use influencers to demonstrate that their products have mass appeal and are widely accessible.  They also focus on appearing genuine, knowing that media-inundated users are unlikely to be swayed by blatant commercials.  For example, influencers often claim to genuinely use and enjoy the products they are promoting, intending to make social media users believe that their endorsement is organic rather than paid.  Today’s consumers want to feel confident that the products they see are vetted and approved by those they trust.

Redefining Luxury

Luxury brands have faced the greatest economic challenges from social media and been forced to adjust their advertising.  Ads have come to focus more on the brands’ uniqueness and craftsmanship rather than exclusivity alone.  Thanks to social media, few things are as exclusive as they once were - everyone can see them.  However, luxury brands can craft their content to appear exclusive, such as claiming that users have been carefully selected to learn about the launch of a new product.  Creating online posts to appear highly exclusive helps maintain the exclusivity of previous decades.

Engagement Over Information

For news and media companies, views themselves are directly akin to revenue.  This has led to an increased focus on engagement rather than providing information.  Today’s social media users demand their news and media to be fast, snappy, and interesting.  Few consumers sit down and read the newspaper or watch an hour-long evening news program on TV.  If a quick image of a news article does not pique our interest, we scroll past.

Critics have long opined that social media has eroded news and media as sources of information or art, replacing thorough and high-brow with glossy snippets that contain little value.  They worry that the need to condense and simplify has hindered society unable to process complexity, with our shrinking attention spans to blame.  Few among us are willing to dig into the details, rendering us vulnerable to oversimplifications and assumptions.  As a result, we shy away from news and media that seem complicated or boring, increasing the risk of being misled by simple but charismatic figures.

Market Failure from Asymmetric Information

So, why is our love of fast, simple media a bad thing?  In the long run, it can lead to market failure due to consumers and producers not understanding the true value and/or risks of their actions.  People will be unable to effectively navigate markets and operate in their own best interest.

Asymmetric Information: Misinformation

The sheer volume of information available, coupled with increasingly powerful AI tools that can create fake news articles, consumer reviews, and even video advertisements, makes it difficult for people to know what is true online.  The blending of news and editorials by some news outlets complicates things further, with viewers struggling to separate fact from opinion.  What is the real news?  What are the real reviews of the product?  Awash with opinion segments and paid influencers, many consumers simply accept the most appealing things they hear.

Asymmetric Information: Echo Chambers

Another factor that increases consumers’ likelihood to fall for misinformation is the lack of diversity of viewpoints.  Thanks to algorithms that focus on engagement, social media users are shown almost exclusively content that mirrors previous content.  This means that those who begin watching and reading low-quality news sources, or even false news sources, will be fed more of the same.  Eventually, they never encounter different views or products, leaving them entirely reliant on a small segment of news, media, and goods and services producers.

Regulate the Algorithms to Reduce Asymmetric Information?

Suggestions that governments should step in to save consumers from their own social media habits have been highly controversial.  Social media companies and the advertisers who pay them are almost certain to strongly resist any reforms that would weaken their ability to direct what users see.  However, widespread political support does exist for restricting minors from being subject to the full force of engagement-hyping algorithms.  Hopefully, these reforms will help today’s youth grow up to be more discerning adults when it comes to their media consumption, less affected by misinformation and echo chambers.