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.
Articles
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Report
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.
There are a number of surveys that attempt to measure the spending intentions of people in the run up towards Christmas. For example a recent study carried out by YouGov found that people in the UK planned to spend an average of £599 on presents for their family and friends. This represented a 5.8% increase on the previous year. Planned total spending on Christmas was estimated to be a staggering £22 billion.
Respondents to another survey, carried out by the hotel chain Travelodge, stated that on average they planned to buy presents for 12 people. This study also found that the average expected spend on each present was £28.70 – an increase of £1.70 on the previous year. A rather obvious question for anyone interested in economics is whether this is either a sensible or an efficient way of allocating resources. One way to think about how an economist might approach this issue is to ask yourself the following questions after you have opened a present on Christmas day.
• How much money do you think the person who gave you the present paid for it?
• Ignoring the sentimental value, if you had not received this present how much would
you be willing to pay to purchase it?
Exactly 20 years ago the economist Joel Waldfogel posed questions very similar to these to a group of 86 students studying an intermediate microeconomics module at Yale University in the USA. On average the respondents to the questions estimated that friends and family had spent $438 on 
the gifts they had received that Christmas. Unfortunately their willingness to pay for these same gifts was $313 on average. Economists would argue that this is an example of economic inefficiency because the recipients’ valuation of the gifts – as measured by their willingness to pay – was only 71.5% of the price paid by the person who gave them the presents. This means that it is possible to make the person who received the gift better off without making the person who purchased the gift any worse off. This argument can be illustrated with a simple example.
Assume you have purchased a Liverpool football club shirt as a present for Sir Alex Ferguson and it cost you £50! Rather surprisingly Sir Alex likes the shirt but would have only been willing to pay £20 if he was buying it for himself. Imagine now that you have given him £50 cash instead of the shirt. This would not make you any worse off – your cash outlay would remain unchanged. However, Sir Alex would now be able to spend the £50 cash in a way which would give him far more satisfaction than the Liverpool football shirt would have given him. Sir Alex can therefore be made better off without making you worse off. The present in this example generates a deadweight welfare loss of £30. Waldfogel concluded from his later research based on a larger sample of people that, on average, people’s valuations of their presents is about 90% of the money actually spent on them. If this figure is accurate, it suggests that over £2 billion will be wasted in the UK this Christmas.
The size of the deadweight welfare loss depends on how well the person who is buying the present knows or understands the preferences of the recipient. The closeness of age, friendship or family relationship are all likely to influence the accuracy of this knowledge. Interestingly, Waldfogel found that presents from grandparents to grandchildren were the most inefficient: i.e. the difference between the recipient’s valuation of the gift and the price paid for the present was the greatest. The study also found that grandparents were more likely to give their grandchildren cash gifts.
Do economists always advise people to give cash as presents? Thankfully the dismal science can find some positive things to say about giving gifts. The previous analysis can be criticised in a number of different ways. It assumes that the recipients are perfectly informed about all the potential gifts that are available. If the person buying the present can find an item that the recipient was unaware of, then it is possible that economic welfare might be increased. It has also been assumed that the pleasure or value people obtain from an item is not influenced by who has purchased it. It may be the case that people place a greater value on an item when it is a gift from somebody else. In the previous example, perhaps Sir Alex would value the Liverpool shirt at £60 if you had purchased it for him as a present. The analysis has also ignored the possibility that the person buying the present derives pleasure from trying to find a gift that they think the person would like. Perhaps people feel a ‘warm glow’ when they see the happiness of somebody opening their present on Christmas day.
A final interesting economic explanation for buying presents is that they might act as an effective signal in a situation where there is asymmetric information. It can be argued that this is the case in relationships where people have private information about their true feelings towards one another. One way of communicating these feelings is by simply telling someone how you feel about them. However, this might not be an effective signal, as someone who does not have such strong feelings could say the same things as someone who does! However, by taking the time and trouble to buy someone a present that they really like, you are able to signal more effectively how you really feel about them. The signal can be particularly strong if the person buying the present really dislikes shopping. Just giving someone cash, or not taking the time to buy a present the person really likes, might signal that you simply could not be bothered to exert the effort because your feelings are not that strong. The potential consequences of giving your partner money are amusingly demonstrated in the following clip: The Economics of Seinfeld: What’s the right Gift to give; cash?
Perhaps giving presents instead of cash is an economically efficient way of dealing with situations where asymmetric information is potentially an important issue.
Articles
British households plan to spend £820 on Christmas YouGov (11/11/13)
Brits ‘to spend more on Christmas presents this year with average gift costing £28.70’ Daily Mirror (13/11/13)
Christmas shoppers hit the sales in biggest spending spree since the recession began Daily Express (15/12/13)
Bah, Humbug The Joy of Economics: Making Sense out of Life, Robert J. Stonebraker (22/05/13)
What many economists don’t understand about Christmas Quartz, Tim Fernholz (19/12/13)
The Economics of Gifts Greg Mankiw’s Blog (24/12/06)
The case against Christmas presents The Guardian (19/12/13)
Grinchonomics or how the Economist stole Christmas Economics in Plain English (16/12/10)
The true value of the 12 days of Christmas reveals giving cash may be the most cost-effective gift Perth Now, Jessica Irvine (21/12/13)
Questions
- Explain what is meant by the term ‘allocative efficiency’. Use a diagram to help illustrate and explain your answer.
- Draw an indifference curve diagram to illustrate the potential welfare costs of giving presents instead of cash.
- Assess whether giving someone a gift card is more economically efficient than giving them a present.
- Using a simple numerical example, explain how economic welfare could be higher if someone buys a present that the recipient was unaware of. What factors might you have to take into account when carrying out this economic analysis?
- Explain what is meant by the term ‘asymmetric information’. Provide a number of examples to help illustrate your answer.
- What properties must a signal have if it is to successfully overcome problems caused by asymmetric information?
Behavioural economics looks at the way in which people behave when making economic decisions about spending. It looks essentially and what people buy and why they buy it. Research in behavioural economics has started to question some of the traditional economic assumptions of rationality and argues that habits and other psychological factors may be more important than conventionally assumed.
Why we buy what we buy Guardian (20/5/08)
Questions
| 1. |
Explain what is meant by ‘behavioural economics’. |
| 2. |
Evaluate the principal factors that people take into account when choosing to buy a consumer good. |
| 3. |
“….. average people are all far more irrational and more human than economists allow”. Discuss the extent to which this might be true. |
In the article below Tim Harford (the Undercover Economist) looks at rationality in the purchase of cigarettes. He consider whether healthy and happy smokers are the same thing and the extent to which smokers would be happier if cigarettes were more expensive.
Why smokers are happier when cigarettes cost more MSN Slate (17/5/08)
Questions
| 1. |
Identify the principal factors that determine the level of demand for cigarettes. |
| 2. |
Given the factors identified in part (a), discuss the likely value of the price elasticity of demand for cigarettes. |
| 3. |
Discuss the extent to which higher cigarette prices would make smokers happier. |
Researchers at the California Institute of Technology have shown that a person’s enjoyment of wine is heightened if they are told that the wine is an expensive one. So what are the main factors determining the demand for wine? Is it really the taste or is it simply the expectation resulting from the price?
Raising a glass to pricey wine BBC News Online (14/1/08)
High price makes wine taste better Times Online (13/2/08)
Why expensive wine tastes the best Metro (13/2/08)
Questions
| 1. |
What are the main factors determining the demand for wine? Assess the relative importance of each of these factors in the overall level of demand. |
| 2. |
Analyse how utility theory can help to explain the level of demand for more expensive wine.
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| 3. |
How would marginal utility and market demand be affected by the knowledge that bottle of wine is a relatively expensive one? |
How Dating Apps Make Money and Why It’s Changing
