The economics of algorithmic selection on the Internet

Algorithms have come to shape our daily lives and realities. They change the perception of the world, affect our behavior by influencing our choices, and are an important source of social order. Algorithms on the Internet have significant economic implications in newly emerging markets and for existing markets in various sectors. A wide range of our daily activities in general and our media consumption in particular are increasingly shaped by algorithms operating behind the scenes. This chapter offers a typology of applications based on algorithmic selection and provides a basic input-throughput-output model in order to show the functioning and economic purposes of the different types of algorithmic selection. It explains theoretical perspectives applied for its analysis and presents results from market analyses. Different phases of the markets for applications using algorithmic selection are shown, their structures and concentration tendencies explored. After a discussion of business models of algorithmic selection with an emphasis on value proposition, value creation and revenue stream the chapter examines selected implications of algorithmic selection for traditional media markets and the incumbents’ profitability. An identification of risks, such as possible violations of basic rights, is complemented by a discussion of regulatory challenges and available governance options.