Profit-Maximizing Media Bias
34 Pages Posted: 23 May 2015 Last revised: 21 Mar 2016
Date Written: March 21, 2016
We present a model of the market for news with rational consumers and profit-maximizing media outlets in which media bias arises endogenously in equilibrium. Our model relaxes assumptions commonly made in the literature that restrict the number of signals a media outlet can communicate to their consumers and the number of news sources accessible by the latter. This leads to novel behavioral implications on the part of the consumers, which, in turn, provides new insights into how media bias depends on the industrial organization of the market for news and the effects of government imposed fairness standards that restrict the degree of bias of individual news sources. Our model is consistent with findings by recent empirical studies that establish relationships between media bias, consumer ideology, and news consumption patterns. It also provides an explanation for documented historical variation in media bias in the U.S. market that is based on changes in the news consumption costs and the intensity of competition. Our policy analysis demonstrates the perverse effects government imposed fairness standards may have when media outlets are profit-maximizing. Specifically, such policies can lead to Pareto inferior outcomes for consumers and can cause some consumers to consume overall more biased bundles of news reports.
Keywords: Media Bias, Fairness Standards, Endogenous Information Acquisition, Confirmation Bias
JEL Classification: D80; L10; L50
Suggested Citation: Suggested Citation