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Open Access Publications from the University of California

The Effects of Online Interactions on Markets and Society

  • Author(s): Jiang, Fan
  • Advisor(s): Brueckner, Jan K
  • Carvalho, Jean-Paul
  • et al.

This dissertation is comprised of three economic theory papers corresponding to its three chapters: two of them explore the effects of online interactions between firms or individuals; two provide novel explanations of how a society can become culturally polarized (one of them is in both categories).

The first chapter is titled "Online Dealers versus Brick-and-Mortar Stores: A Welfare Analysis". Online intermediaries play an increasingly important role in numerous markets. The literature on intermediation has mainly considered intermediaries as information gatekeepers, a role limited to advertising sellers' prices. This paper focuses on intermediaries as dealers or resellers, who acquire final goods through wholesale trade with producers. Consumers often believe that intermediaries can benefit them by mitigating information imperfections. But in many cases, intermediary entry actually lowers consumer surplus, and having more than one intermediary in the one-producer setting allows the monopolist producer to extract the entire consumer surplus. In all cases, however, conditions exist under which the presence of an intermediary improves overall welfare, including producer surplus.

The second chapter is titled "Cultural Polarization through Online Communication and Economic Growth". Over the past decade, people have become increasingly partisan in their political views (Stroud 2011). While a growing literature examines the relationship between media slant and polarizing views, this paper provides an explanation of cultural polarization without endogenous media bias. Whereas word-of-mouth communication combines speaking and listening, online communication through social media has decoupled interaction into the sending and receiving of messages. Consumers are influenced by the news content viewed and the messages received. When the cost of sending messages is higher, extremists have a greater influence on preference formation. Rising wages over time naturally raise the opportunity cost of sending messages, and, when combined with the decoupling of social interaction, this increase implies that we should expect to see increasing cultural polarization.

The third chapter, "Defensive Extremism: Polarization from a Concern for Balance", further examines naturally polarizing forces in society. Online communication through social media is reshaping the way people interact. While a rich literature in psychology, sociology, political science, and economics has studied many models of socialization among individuals and within groups, this paper offers a model of socialization between groups. Individuals can now easily identify others with similar views through the Internet, but at the same time, the openness of online interactions exposes people to views representing a variety of beliefs and preferences. In this model, agents choose to join a group, and each group seeks to maximize the collective utility of its members by endorsing a message that represents its views. The agents' views are updated following exposure to the messages, and changes lead to disutility. In many cases, each group chooses an extreme message relative to its members' views in order to minimize this disutility. Messages are not meant to influence the other group's members but rather to balance out the in-group's exposure to the out-group's extremism. This "defensive extremism" leads to interesting results that bolster and add to the literature's understanding of socialization and its consequences.

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