Social Connectedness and Information Markets

Abstract

This paper investigates information quality in a simple model of socially connected information markets. Suppliers’ payoffs derive from the fraction of consumers who see their stories. Consumers prefer to share and act only on high-quality information. Quality is endogenous and highest when social connectedness is neither too high nor too low. In highly connected markets, low-quality stories are widely seen, giving suppliers little incentive to invest in quality. Increasing the volume of misinformation and increasing consumers’ costs of tuning in to suppliers’ broadcasts can each increase equilibrium information quality. (JEL D11, D82, D83, L82, Z13)