The value of recommendations
Many markets without repeated seller–buyer relations feature third-party “monitors” that sell recommendations. We analyze the profit-maximizing recommendation policies of such monitors. In an infinitely repeated game with seller moral hazard and short-lived consumers, a monopolistic monitor with superior information about the sellerʼs past effort decisions sells recommendations about the seller to consumers. We show that the monitor has an incentive to make its recommendations hard to predict, which in general leads to inefficient effort provision by the seller. These results hold under perfect and imperfect monitoring and in a variety of informational setting. When there are multiple competing sellers, the conflict between the monitorʼs profit-maximization objective and efficient effort provision is mitigated.
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