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The Economic Impact of Blogging

November 26, 2006

As part of my MBA economics coursework, I had to write a paper addressing an economic issue and its related solution. I wrote my paper on the economic issues of traditional media and the social media solution (thanks to blogging, and more recently, podcasting, plus all other content-sharing sites). The paper isn’t due until early December, but I just wrapped it up over the holiday and wanted to share it with my blog readers (with the prof’s permission of course). So, below is my paper. Be advised: I am NOT an economics expert - this is just my attempt at discussing the economic issues and solutions surrounding traditional and social media. Enjoy.

Download the PDF version (216KB, 7pages) that includes extra sections on the history of traditional and social media, as well as a briefing on the suffering of traditional media.

The Economics of Traditional Media Market Failure
And Technology’s Social Media Solution

The traditional news media market - including radio, television and newspapers - has long suffered from market failure. The most critical sources of traditional news media market failure included imperfect information and imperfect competition. The introduction of the internet and the recent widespread growth of social media - namely blogs, podcasts and content-sharing sites - have helped to correct the traditional media market failure by providing exponentially more news and information to people - whenever, wherever.

The Issues

Prior to the internet and social media, there were traditional media market failures of imperfect information and imperfect competition.

Market Failure of Imperfect Information

The conclusion that markets work efficiently rest heavily on the assumption that consumers and producers have full knowledge… The absence of full information can lead to transactions that are ultimately disadvantageous, according to “Principles of Economics” by Karl Case of Wellesley College and Ray Fair of Yale University.

Naturally, limited sources of news and information equal the absence of complete information. Plus, traditional media control how, when, where and what news the public consumes. With limited space and time, a privileged few - editors, producers and reporters - dictate what news and information is released.

Prior to the internet, the power of information was usually heavily skewed. Sellers of complex products and services - such as car salespeople, real estate agents, insurance providers, stock brokers, physicians, lawyers and mortgage brokers - had more information than the consumer, which made it difficult to determine true prices.

Also prior to the internet, it was more difficult to gather balanced consumer goods information and make educated purchasing decisions when it came to durable goods like dishwashers, microwaves and personal electronics.

Market Failure of Imperfect Competition

Although a monopoly and oligopoly have little or no other competition, the firm(s) still must produce something that people want. In all imperfectly competitive industries, output is lower - the product is underproduced - and price is higher than it would be under perfect competition, according to Case and Fair.

Traditional media maintained monopolies and oligopolies in many marketplaces where only one or a few newspapers, television channels and radio stations were available. Control of reader’s eyes and ears coupled with limited time and space usually meant only the most sensational of stories made headlines - as selected by a handful of news decision-makers. With imperfect competition and inefficient allocation of resources, traditional media chose price, content and distribution (frequency, location, method, etc.).

The Solution

Market Correction of Information

The internet alone resulted in a dramatic increase in the supply of news and information (see figure 1 - news and information supply curve shifts right). Supply of news has grown exponentially with the recent widespread growth and popularity of social media - such as blogs, podcasts, and content-sharing sites - that can be accessed by internet users whenever, wherever. Large-scale internet usage combined with significant broadband penetration also caused consumers to crave more news and information, around the clock (see figure 2 - news and information demand curve shifts right).

With ample supply of inexpensive or free news content available online, the demand for traditional news media weakened (see figure 3 - traditional media demand curve shifts left) and, as such, the demand for traditional news media advertising decreased (see figure 4 - traditional media advertising demand curve shifts left). To stabilize circulation and advertising, traditional news media were forced to transition to new business models that attempted to provide more inexpensive (or free), easily accessible content.

Market Correction of Competition

The internet generated countless free, easily accessible and searchable news sources for a global audience. Today, with social media grabbing the attention-share of larger and larger audiences, traditional news media have published more free and inexpensive content online.

Newspapers are posting new content and content from print editions online, and often for no fee. Television stations have excerpts and full-length video programs available online. Radio stations stream live broadcasts. Traditional journalists across all mediums also maintain blogs with their traditional parent media companies featuring podcasts and other social media features for readers, listeners and viewers. Arguably, as with any increase in education, the greater education that results from the abundance of social media’s news and information leads to more altruistic citizens and, possibly, produces a workforce that can create more wealth (see figure 5 -wealth supply curve shifts right).

The Argument of Social Media Causing New Economic Failures

Some argue that social media is not an economic solution but instead has created new economic issues surrounding validity and reliability. The question of journalistic mistrust existed long before the internet; however, social media and the abundance of information available today make it easier for people to decipher the truth and assign red flags to inaccuracies.

For example, since the advent of the internet and the flood of bloggers, dozens of new journalism scandals have been uncovered. Of online encyclopedia Wikipedia’s 44 journalist scandals listed in its “Journalism Scandals” article, 34 scandals (77 percent) occurred after 2001.

Additionally, the online reference tool Wikipedia itself has faced questions about its accuracy. In 2005, Nature magazine conducted a head-to-head comparison between Wikipedia and Britannica. Experts compared 42 science-related articles and found that Wikipedia averaged four errors per article while Britannica averaged three. Nature magazine concluded that major errors in Wikipedia are the exception rather than the rule and that the difference in accuracy between Britannica and Wikipedia was not “particularly great.” Some also argue that Wikipedia’s articles were nearly three times longer than Britannica’s, meaning, at the time of the study, Wikipedia had an error rate far less than Britannica.

Regardless, the fact remains that 60 million blogs and 50,000 podcasts have created a much healthier system of journalistic checks and balances.

Conclusion

Today, traditional media market failure is being addressed with technology and social media - most noticeably blogs and podcasts. Consumers enjoy a wealth of free, user-friendly news and information that can be verified for accuracy more quickly and easily. Traditional media are working to reinvent themselves and develop new business models to grow in the internet era. Journalism.org’s “The State of The News Media 2006,” pointed to one senior media executive who said the situation amounts to a race against time. The report asks, “Can newspapers keep pace with changing media consumption patterns and some formidable competitors?”

Filed Under Blogging, Educational, Management, Marketing, Media, Public Relations, Technology

Comments

One Response to “The Economic Impact of Blogging”

Leo Bottary on November 26th, 2006 7:49 pm

Looks great. I’ve found graduate school projects can make good blog fodder as well!

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