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Optimal Pricing with Recommender Systems

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Abstract

We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations.

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File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1563.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1563.

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Length: 12 pages
Date of creation: Mar 2006
Date of revision:
Publication status: Published in Proceedings of the 7th ACM Conference on Electronic Commerce, Ann Arbor, MI, 2006, pp. 43-51
Handle: RePEc:cwl:cwldpp:1563

Note: CFP 1177
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Recommender system; Collaborative filtering; Add-ons; Pricing; Information externality;

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  1. Paul Resnick & Christopher Avery & Richard Zeckhauser, 1999. "The Market for Evaluations," American Economic Review, American Economic Association, vol. 89(3), pages 564-584, June.
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