Akerlof, Experience Goods, and why Micropayment for News won't work

“The difficulty of distinguishing good quality from bad is inherent in the business world,” Nobel laureate George Akerlof wrote in the kicker of his most famous paper, published in 1970. “This may indeed explain many economic institutions and may in fact be one of the more important aspects of uncertainty.”

Akerlof fired an early shot in a scholarly marathon to study the effects of asymmetric information in markets. What do parties to a potential transaction do when they know different sets of facts? Maybe that seems like an obvious question, but economists in the middle of the twentieth century had been pretty busy worrying about perfecting complicated models despite their grossly simplistic assumptions.

So Akerlof set about to write about how markets can fail when some of those assumptions turn out to be bunk. The assumption he tested first, in “The Market for ‘Lemons,’” was certainty, and he showed that when sellers know more about the goods being sold than the buyers do, sellers abuse their privileged position and buyers leave the market.

Writing in the same year, the economist Phillip Nelson studied the differences between what he called “search goods” and “experience goods.” Search goods and experience goods express a certain kind of asymmetry. For search goods, consumers can overcome the asymmetry before the point of purchase by doing their homework, while for experience goods, consumers must take their time and invest.

News articles are experience goods. Just as with an apple, you need to consume the story, reading the article or watching the video or so on, in order to judge its quality. “Stories can vary in length, accuracy, style of presentation, and focus,” writes economist James Hamilton in All the News That’s Fit to Sell. “For a given day’s events, widely divergent news products are offered to answer the questions of who, what, where, when, and why.” We can’t know which one’s best till we’ve read them all, and who’s got time for that?

We have now spent about a decade Googling. We have spent years indulging in information, and they have been wonderful years. We are overawed by our ability to answer questions online. Wikipedia has helped immensely in our efforts to answer those questions, but pagerank elevated even it. Newspapers compose just one kind of Web site to have plunged into the scrum of search engine optimization. Everyone’s hungry for links and clicks.