According to Ofcom’s November 2024 Online Nation report (see report linked below), UK adults are falling out of love with dating apps. Use of the top three platforms in the UK (Tinder, Hinge, and Bumble) is declining, even though most users are juggling multiple apps at once. So, what’s going on? Economics may have some valuable insights to help explain the decline.
Too much choice
First, dating platforms don’t function like typical commodity markets, where prices adjust until supply and demand balance. Instead, dating can be seen as what economists call a ‘matching market’, where success depends on mutual interest, not on a specific price. So even with thousands of potential matches, forming actual connections remains difficult, and more choice doesn’t necessarily translate into better outcomes.
In fact, more choice can backfire. The paradox of choice, a behavioural economics concept, suggests that too many options can lead to choice paralysis. Instead of feeling empowered by an abundance of potential partners, users can feel overwhelmed, unsure, and often less satisfied with whatever choice they end up making (if they make one at all).
So, while we often think of dating apps, like many other platforms, benefiting from positive network effects, where more users increase the platform’s value by offering more potential matches, this can also have negative effects. Swiping through endless profiles and repeating the same small talk, can turn dating into a chore rather than an exciting opportunity.
Adverse selection
What makes this even harder is that users can’t easily distinguish between who’s genuinely looking for the same thing you are, and who’s just there to pass the time. This information asymmetry leads to the adverse selection problem – a concept famously explored by economist George Akerlof in his 1970 paper ‘The Market for Lemons’ (see link below). He showed how lack of information about product quality can cause high-quality sellers to exit, resulting in market failure where the market becomes dominated by low-quality goods (i.e. ‘lemons’).
A similar dynamic can play out on dating apps. If users believe most profiles are unserious or not genuine, they become less willing to engage, or even stay on the platform. Meanwhile, the most genuine users may give up altogether, worsening the quality of the pool and discouraging others.
In economics, there are some well-known ways in which the problem of adverse selection could be overcome. One such possibility is through signalling, where the more informed person tries to reveal important information to the uninformed person. Indeed, platforms have experimented with signalling mechanisms, like verification tools for example. Paid subscriptions have also been implemented, which could help to some extent (assuming that those who are willing to pay are those who are genuine and serious about finding a match). But these solutions only go so far, and with fewer users paying to signal intent, the problem persists.
Lack of innovation
This ties into the wider revenue model of dating apps. Unlike many apps that rely on revenue from advertising on one side of the market to offer the app free to consumers on the other side, dating platforms often rely more on revenue through monthly subscriptions and paid upgrades. But with fewer users willing to pay, these platforms may be under pressure. This financial pressure may also affect their ability to innovate or improve the service.
In fact, in the dating app world, there is another reason why platforms may not be innovating as much as they should, aside from simply trying to convince their users to pay for a better service. While it seems like there’s endless choice in the dating app world, much of the market is controlled by a single company, InterActiveCorp (IAC), which owns Tinder, Hinge, Match.com and more. With limited competition, there’s less incentive to compete on quality.
Worse still, dating apps face a unique business problem: if their service works too well, users leave and delete the app. So, there may be a built-in tension between helping users succeed and keeping them swiping.
The outlook for dating apps
So, is the decline in dating app use just temporary, or the start of something bigger? Time will tell. However, from an economics perspective, there is a noticeable shift in demand towards substitutes, such as organised in-person social events and activities, which encourages more and more of these opportunities to emerge. This shift may reflect changing preferences and the costs (in terms of time and emotional energy) that users are willing to invest in online dating.
At the same time, AI already plays a key role in dating apps, and new possibilities seem to be emerging. For example, we could see a bigger rollout of AI-driven chatbots that facilitate conversations or even interact on behalf of users. This could make it easier to connect with potential matches and might help in addressing some of the other issues discussed above.
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Questions
- How might ‘signalling’ and ‘screening’ be used to create new features or services that could help overcome the adverse selection problem in this market?
- Can you think of any other ways in which the adverse selection problem could be overcome in this context?
- Draw a diagram to illustrate the two-sided nature of the dating app market, making clear where there may be positive or negative network effects.
- How else might dating app platforms be making revenue that allows them to offer the app to users at no charge?
- Is the dating app market competitive? You might consider factors such as the availability of substitutes, barriers to entry and innovation.
Imagine a situation where you are thinking of buying a good and so you go to an e-commerce marketplace such as Amazon, eBay, Etsy or Onbuy. How confident are you about the quality of the different brands/makes that are listed for sale on these digital platforms? How do you choose which product to buy? Is the decision strongly influenced by customer reviews and rating?
When a customer is choosing what to buy it raises an interesting question: to what extent can the true quality of the different goods/services be observed at the time of purchase? Although perfect observability is highly unlikely, the level of consumer information about a product’s true quality will vary between different types of transaction.
For example, when consumers can physically inspect and test/try a product in a shop, it can help them to make more accurate judgements about its quality and condition. This poses a problem for online sellers of high-quality versions of a good. Without the ability to inspect the item physically, consumers may be unsure about its characteristics. They may worry that the online description provided by the seller deliberately misrepresents the true quality of the item.
Consumers may have other concerns about the general reliability of online sellers. For example, in comparison to buying the product from a physical store, consumers may worry that:
- They will have to wait longer to receive the good. In many cases, when consumers purchase a product from a high-street store, they can walk away with the item and start using it straight away. When purchasing on line, they may end up waiting weeks or even longer before the product is finally delivered.
- It will be more difficult to return the product and get a refund.
- They are more likely to come across fraudulent sellers who have set-up a fake website.
This greater level of uncertainty about the true characteristics of the product and the general reliability of the seller will have a negative impact on consumers’ willingness to pay for all goods. This impact is likely to be particularly strong for high-quality versions of a product. If consumers’ willingness to pay falls below the reservation price of many sellers of high-quality goods, then the market could suffer from adverse selection and market failure.
Are there any within-market arrangements that could help deal with this issue? One possibility is for sellers to signal the quality of their products by posting consumer ratings and reviews. If consumers see that a product has many positive ratings, then this will increase their confidence in the quality of the product and so increase their willingness to pay. This could then reduce both levels of asymmetric information and the chances of adverse selection occurring in the market,
There is survey evidence that many people do read consumer reviews when choosing products on line and are heavily influenced by the ratings.
The problem of fake reviews
However, when consumers look at these reviews can they be sure that they reflect consumers’ honest opinions and/or actual experience of using the good or service? Firms may have an incentive to manipulate and post fake reviews. For example, they could:
- Deliberately fail to display negative reviews on their website while claiming that all reviews are published.
- Use internet bots to post thousands of automated reviews.
- Take positive reviews from competitors’ websites and post them on their own website.
- Pay some customers and/or employees to write and post 5-star reviews on their own website.
- Pay some customers and/or employees to write and post 1-star reviews on their competitors’ websites.
- Set up a website that they claim is independent and use it to provide positive endorsements of their own products.
If the benefits of this type of behaviour outweigh the costs, then we would expect to see fake reviews posted on websites. If their use becomes widespread, then the value of posting genuine reviews will fall. The market may then settle into what economists call a ‘pooling equilibrium’.
What evidence do we have on the posting of fake reviews? Given their nature, it is difficult to collect reliable data and there are large variations in the reported figures. One recent study found evidence of fake reviews being purchased and posted for approximately 1500 products on Amazon.
Can consumers screen reviews and identify those that are more likely to be fake? The following are some tell-tale signs.
- Products that receive a large number of very positive reviews over a short period (i.e. a few days). There are then long periods before the product receives another large number of positive reviews.
- A high percentage of 5-star reviews. Two, three and four start reviews are more likely to be genuine.
- Reviews that specifically mention a rival firm’s products.
- Reviewers who have given very high ratings to large number of different products over a short period of time.
- Reviews that include photos/videos.
Competition authorities around the world have been investigating the issue and the Competition and Markets Authority has announced plans to introduce new laws that make the purchasing and posting of fake reviews illegal.
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Questions
- Outline different types of asymmetric information and explain the difference between adverse selection and moral hazard.
- Using a diagram, explain the impact of uncertainty over the quality of a good on consumers’ willingness to pay.
- Will consumers always face greater uncertainty over quality when purchasing goods on line rather than visiting the high street? Discuss your answer making reference to some specific examples.
- Using diagrams, explain how a market for high-quality versions of a good might collapse if there is asymmetric information. Using price elasticity of supply, explain the circumstances when the market is more likely to collapse.
- Discuss some of the benefits and costs for a firm of purchasing and posting fake reviews.
Britain has faced some its worst ever weather, with thousands of homes flooded once again, though the total number of flooded households has fallen compared to previous floods. However, for many households, it is just more of the same – if you’ve been flooded once, you’re likely to be flooded again and hence insurance against flooding is essential. But, if you’re an insurance company, do you really want to provide cover to a house that you can almost guarantee will flood?
The government has pledged thousands to help households and businesses recover from the damage left by the floods and David Cameron’s latest step has been to urge insurance companies to deal with claims for flood damage as fast as possible. He has not, however, said anything regarding ‘premium holidays’ for flood victims.
The problem is that the premium you are charged depends on many factors and one key aspect is the likelihood of making a claim. The more likely the claim, the higher the premium. If a household has previous experience of flooding, the insurance company will know that there is a greater likelihood of flooding occurring again and thus the premium will be increased to reflect this greater risk. There have been concerns that some particularly vulnerable home-owners will be unable to find or afford home insurance.
The key thing with insurance is that in order for it to be provided privately, certain conditions must hold. The probability of the event occurring must be less than 1 – insurance companies will not insure against certainty. The probability of the event must be known on aggregate to allow insurance companies to calculate premiums. Probabilities must be independent – if one person makes a claim, it should not increase the likelihood of others making claims.
Finally, there should be no adverse selection or moral hazard, both of which derive from asymmetric information. The former occurs where the person taking out the insurance can hide information from the company (i.e. that they are a bad risk) and the latter occurs when the person taking out insurance changes their behaviour once they are insured. Only if these conditions hold or there are easy solutions will the private market provide insurance.
On the demand-side, consumers must be willing to pay for insurance, which provides them with protection against certain contingencies: in this case against the cost of flood damage. Given the choice, rational consumers will only take out an insurance policy if they believe that the value they get from the certainty of knowing they are covered exceeds the cost of paying the insurance premium. However, if the private market fails to offer insurance, because of failures on the supply-side, there will be major gaps in coverage.
Furthermore, even if insurance policies are offered to those at most risk of flooding, the premiums charged by the insurance companies must be high enough to cover the cost of flood damage. For some homeowners, these premiums may be unaffordable, again leading to gaps in coverage.
Perhaps here there is a growing role for the government and we have seen proposals for a government-backed flood insurance scheme for high-risk properties due to start in 2015. However, a loop hole may mean that wealthy homeowners pay a levy for it, but are not able to benefit from the cheaper premiums, as they are deemed to be able to afford higher premiums. This could see many homes in the Somerset Levels being left out of this scheme, despite households being underwater for months. There is also a further role for government here and that is more investment in flood defences. If that occurs though, where will the money come from? The following articles consider flooding and the problem of insurance.
Articles
Insurers urged to process flood claims quickly BBC News (17/2/14)
Flood area defences put on hold by government funding cuts The Guardian, Damian Carrington and Rajeev Syal (17/2/14)
Flooding: 200,000 houses at risk of being uninsurable The Telegraph (31/1/12)
Govt flood insurance plan ‘will not work’ Sky News (14/2/14)
Have we learned our lessons on flooding? BBC News, Roger Harrabin (14/2/14)
ABI refuses to renew statement of principles for flood insurance Insurance Age, Emmanuel Kenning (31/1/12)
Wealthy will have to pay more for flood insurance but won’t be covered because their houses are too expensive Mail Online, James Chapman (7/2/14)
Buyers need ‘flood ratings’ on all houses, Aviva Chief warns The Telegraph, James Quinn (15/2/14)
Wealthy homeowners won’t be helped by flood insurance scheme The Telegraph(11/2/14)
Costly insurance ‘will create flood-risk ghettos and £4.3tn fall in house values’ The Guardian, Patrick Wintour (12/2/14)
Leashold homes face flood insurance risk Financial Times, Alistair Gray (10/2/14)
Questions
- Consider the market for insurance against flood damage. Are risks less than one? Explain your answer.
- Explain whether or not the risk of flooding is independent.
- Are the problems of moral hazard and adverse selection relevant in the case of home insurance against flood damage?
- To what extent is the proposed government-backed flood insurance an equitable scheme? Should the government be stepping in to provide insurance itself?
- Should there be greater regulation when houses are sold to provide better information about the risk of flooding?
- Why if the concept of opportunity cost relevant here?
- How might household values be affected by recent floods, in light of the issues with insurance?
Next year a government agreement with insurance companies is set to end. This agreement requires insurance companies to provide cover for homes at a high risk of flooding.
However, in June 2013, this agreement will no longer be in place and this has led to mounting concerns that it will leave thousands of home-owners with the inability either to find or afford home insurance.
The key thing with insurance is that in order for it to be provided privately, certain conditions must hold. The probability of the event occurring must be less than 1 – insurance companies will not insure against certainty. The probability of the event must be known on aggregate to allow insurance companies to calculate premiums. Probabilities must be independent – if one person makes a claim, it should not increase the likelihood of others making claims.
Finally, there should be no adverse selection or moral hazard, both of which derive from asymmetric information. The former occurs where the person taking out the insurance can hide information from the company (i.e. that they are a bad risk) and the latter occurs when the person taking out insurance changes their behaviour once they are insured. Only if these conditions hold or there are easy solutions will the private market provide insurance.
On the demand-side, consumers must be willing to pay for insurance, which provides them with protection against certain contingencies: in this case against the cost of flood damage. Given the choice, rational consumers will only take out an insurance policy if they believe that the value they get from the certainty of knowing they are covered exceeds the cost of paying the insurance premium. However, if the private market fails to offer insurance, because of failures on the supply-side, there will be major gaps in coverage.
Furthermore, even if insurance policies are offered to those at most risk of flooding, the premiums charged by the insurance companies must be high enough to cover the cost of flood damage. For some homeowners, these premiums may be unaffordable, again leading to gaps in coverage.
In light of the agreement coming to an end next year, there is pressure on the government firstly to ensure that insurance cover is available to everyone at affordable prices and secondly to continue to build up flood defences in the most affected areas. Not an easy task given the budget cuts. The following articles provide some of the coverage of the problems of insuring against flood damage.
Articles
200,000 homes ‘at flooding risk’ BBC News (3/1/12)
MPs slam government flood defences Post Online, Chris Wheal (31/1/12)
Flooding: 200,000 houses at risk of being uninsurable The Telegraph (31/1/12)
Flood defences hit by government cuts ‘mismatch’, says MP Guardian, Damian Carrington (31/1/12)
Fears over cash for flood defences The Press Association (31/1/12)
ABI refuses to renew statement of principles for flood insurance Insurance Age, Emmanuel Kenning (31/1/12)
Questions
- Consider the market for insurance against flood damage. Are risks less than one? Explain your answer
- Explain whether or not the risk of flooding is independent.
- Are the problems of moral hazard and adverse selection relevant in the case of home insurance against flood damage?
- If ABI doesn’t put in place another agreement to provide insurance to homeowners at most risk of flooding, what could be the adverse economic consequences?
- Is there an argument for the government stepping in to provide insurance itself?
- Explain why insurance premiums are so much higher for those at most risk of flooding. Is it equitable?
Most people are risk-averse: we like certainty and are generally prepared to pay a premium for it. The reason is that certainty gives us positive marginal utility and so as long as the price of insurance (which gives us certainty) is less than the price we place on certainty, we will be willing to pay a positive premium. By having insurance, we know that should the unexpected happen, someone else will cover the risk. As long as there are some risk-averse people, there will always be a demand for insurance.
However, will private companies will be willing to supply it? For private market insurance to be efficient, 5 conditions must hold:
1. Probabilities must be independent
2. Probabilities must be less than one
3. Probabilities must be known or estimable
4. There must be no adverse selection
5. There must be no moral hazard
If these conditions hold or if there are simple solutions, then insurance companies will be willing and able to provide insurance at a price consumers are willing to pay.
There are many markets where we take out insurance – some of them where insurance is compulsory, including home and car insurance. However, one type of insurance that is not compulsory is that for cyclists. No insurance is needed to cycle on the road, but with cycle use increasing and with that the number of accidents involving cyclists also increasing, the calls for cyclists to have some type of insurance is growing. If they are hit by someone without insurance and perhaps suffer from a loss of income; or if they cause vehicle damage, they will receive no compensation. However, whilst the risk of accident is increasing for cyclists, they are still statistically less likely to cause an accident than motorists. Perhaps a mere £30 or £40 per year for a policy is a price worth paying to give cyclists certainty. At least, this is what the Association of British Insurers (ABI) is claiming – hardly surprising when their members made a combined loss of £1.2 billion!
Articles
Cyclists ‘urged to get insurance’ BBC News, Maleen Saeed (26/11/11)
Cyclists urged to get more insurance by … insurance companies Road.CC, Tony Farrelly (26/11/11)
The future of cycle insurance Environmental Transport Assocaition (24/11/11)
Questions
- With each of the above conditions required for private insurance to be possible, explain why each must hold.
- What do we mean by no moral hazard and no adverse selection? Why would their existence prevent a private company from providing insurance?
- Using the concept of marginal utility theory, explain why there is a positive demand insurance.
- What might explain why cyclists are less likely to take out insurance given your answer to the above question?
- Do you think cyclist insurance should be compulsory? If governments are trying to encourage more sustainable transport policy, do you think this is a viable policy?
