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Recommenders’ originals: The welfare effects of the dual role of platforms as producers and recommender systems

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  • Aridor, Guy
  • Gonçalves, Duarte

Abstract

We study a model of strategic interaction between a producer and a platform that employs a recommendation system, following an information design approach. Upon entry into the production market, the platform biases recommendations to credibly steer consumers towards its own goods. Despite the increased upstream competition, platform entry and self-preferencing can decrease consumer welfare and result in foreclosure of the independent producer. We then consider the natural policy remedy of separating recommendation and production or imposing unbiased recommendations and find it leads to welfare gains if the platform’s revenue potential is large enough, but to significant welfare losses when it is not. The ambiguity of such a policy’s welfare implications and the dependence on the industry’s returns highlights the importance of targeted restrictions on platform self-preferencing.

Suggested Citation

  • Aridor, Guy & Gonçalves, Duarte, 2022. "Recommenders’ originals: The welfare effects of the dual role of platforms as producers and recommender systems," International Journal of Industrial Organization, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:indorg:v:83:y:2022:i:c:s0167718722000212
    DOI: 10.1016/j.ijindorg.2022.102845
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    Cited by:

    1. Guy Aridor & Duarte Gonçalves & Daniel Kluver & Ruoyan Kong & Joseph Konstan, 2022. "The Economics of Recommender Systems: Evidence from a Field Experiment on MovieLens," CESifo Working Paper Series 10129, CESifo.

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    More about this item

    Keywords

    Recommender system; Biased intermediation; Self-preferencing; Upstream entry; Information design;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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