IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v42y2023i2p360-376.html
   My bibliography  Save this article

Competing for Recommendations: The Strategic Impact of Personalized Product Recommendations in Online Marketplaces

Author

Listed:
  • Bo Zhou

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Tianxin Zou

    (Warrington College of Business, University of Florida, Gainesville, Florida 32611)

Abstract

We study how an online marketplace’s personalized product recommendations and its consumer profiling accuracy affect third-party sellers’ competition and the market outcomes. Sellers strategically adjust prices to compete for the marketplace’s recommendations. As the marketplace more accurately predicts consumers’ preferences, the equilibrium price first decreases and then increases, and both the marketplace’s and the sellers’ profits may decrease despite the improved recommendation accuracy. Moreover, recommending the most profitable product for each recommendation may reduce profits of the marketplace and the sellers, and the marketplace can benefit from excluding pricing information in its recommendation decisions to prevent sellers’ recommendation competition. Counterintuitively, regulations that bar recommendations from considering profit margin information can lead to higher prices and thus harm consumers. These results are driven by competing sellers’ three distinctive incentives: competing for recommendations, exploiting targeted consumers, and undercutting rivals’ prices. We also find that our key insights remain qualitatively unchanged if the marketplace recommends products based on consumer surplus, and the equilibrium price will be lower in comparison. Finally, various extensions demonstrate the robustness of these results.

Suggested Citation

  • Bo Zhou & Tianxin Zou, 2023. "Competing for Recommendations: The Strategic Impact of Personalized Product Recommendations in Online Marketplaces," Marketing Science, INFORMS, vol. 42(2), pages 360-376, March.
  • Handle: RePEc:inm:ormksc:v:42:y:2023:i:2:p:360-376
    DOI: 10.1287/mksc.2022.1388
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.2022.1388
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mksc.2022.1388?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    2. Kar Yan Tam & Shuk Ying Ho, 2005. "Web Personalization as a Persuasion Strategy: An Elaboration Likelihood Model Perspective," Information Systems Research, INFORMS, vol. 16(3), pages 271-291, September.
    3. Hagiu, Andrei & Jullien, Bruno, 2014. "Search diversion and platform competition," International Journal of Industrial Organization, Elsevier, vol. 33(C), pages 48-60.
    4. Anuj Kumar & Kartik Hosanagar, 2019. "Measuring the Value of Recommendation Links on Product Demand," Information Systems Research, INFORMS, vol. 30(3), pages 819-838, September.
    5. Roman Inderst & Marco Ottaviani, 2012. "Competition through Commissions and Kickbacks," American Economic Review, American Economic Association, vol. 102(2), pages 780-809, April.
    6. Jan Krämer, & Daniel Schnurr,, 2018. "Is there a need for platform neutrality regulation in the EU?," Telecommunications Policy, Elsevier, vol. 42(7), pages 514-529.
    7. Oliver Hinz & Jochen Eckert, 2010. "The Impact of Search and Recommendation Systems on Sales in Electronic Commerce," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 2(2), pages 67-77, April.
    8. Hana Choi & Carl F. Mela, 2019. "Monetizing Online Marketplaces," Marketing Science, INFORMS, vol. 38(6), pages 948-972, November.
    9. Lusi Li & Jianqing Chen & Srinivasan Raghunathan, 2018. "Recommender System Rethink: Implications for an Electronic Marketplace with Competing Manufacturers," Information Systems Research, INFORMS, vol. 29(4), pages 1003-1023, December.
    10. Andrei Hagiu & Bruno Jullien, 2011. "Why do intermediaries divert search?," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 337-362, June.
    11. Huanxing Yang, 2013. "Targeted search and the long tail effect," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 733-756, December.
    12. Dong-Hui Yang & Xing Gao, 2017. "Online retailer recommender systems: a competitive analysis," International Journal of Production Research, Taylor & Francis Journals, vol. 55(14), pages 4089-4109, July.
    13. Tat-How Teh & Julian Wright, 2022. "Intermediation and Steering: Competition in Prices and Commissions," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 281-321, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xingchen Xu & Stephanie Lee & Yong Tan, 2023. "Algorithmic Collusion or Competition: the Role of Platforms' Recommender Systems," Papers 2309.14548, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Morgane Cure & Matthias Hunold & Reinhold Kesler & Ulrich Laitenberger & Thomas Larrieu, 2022. "Vertical integration of platforms and product prominence," Quantitative Marketing and Economics (QME), Springer, vol. 20(4), pages 353-395, December.
    2. Dirk Bergemann & Alessandro Bonatti, 2024. "Data, Competition, and Digital Platforms," American Economic Review, American Economic Association, vol. 114(8), pages 2553-2595, August.
    3. Fei Long & Kinshuk Jerath & Miklos Sarvary, 2022. "Designing an Online Retail Marketplace: Leveraging Information from Sponsored Advertising," Marketing Science, INFORMS, vol. 41(1), pages 115-138, January.
    4. Matthias Hunold & Ulrich Laitenberger & Guillaume Thébaudin, 2022. "Bye-box: An Analysis of Non-Promotion on the Amazon Marketplace 03.06.2022," Working Papers hal-04104183, HAL.
    5. Marc Bourreau & Germain Gaudin, 2022. "Streaming platform and strategic recommendation bias," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 25-47, February.
    6. Justin P. Johnson & Andrew Rhodes & Matthijs Wildenbeest, 2023. "Platform Design When Sellers Use Pricing Algorithms," Econometrica, Econometric Society, vol. 91(5), pages 1841-1879, September.
    7. Martin Peitz, 2023. "Governance and Regulation of Platforms," CRC TR 224 Discussion Paper Series crctr224_2023_480, University of Bonn and University of Mannheim, Germany.
    8. Hui Song, 2021. "Prominence of store-brand products in an electronic platform," Journal of Economics, Springer, vol. 133(1), pages 47-83, June.
    9. 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).
    10. Matthias Hunold & Reinhold Kesler & Ulrich Laitenberger, 2020. "Rankings of Online Travel Agents, Channel Pricing, and Consumer Protection," Marketing Science, INFORMS, vol. 39(1), pages 92-116, January.
    11. Zemin (Zachary) Zhong, 2023. "Platform Search Design: The Roles of Precision and Price," Marketing Science, INFORMS, vol. 42(2), pages 293-313, March.
    12. Wei Zhou & Zidong Wang, 2020. "Competing for Search Traffic in Query Markets: Entry Strategy, Platform Design, and Entrepreneurship," Working Papers 20-12, NET Institute.
    13. Alaoui, Larbi & Germano, Fabrizio, 2020. "Time scarcity and the market for news," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 173-195.
    14. Casner, Ben, 2020. "Seller curation in platforms," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    15. Dokyun Lee & Kartik Hosanagar, 2021. "How Do Product Attributes and Reviews Moderate the Impact of Recommender Systems Through Purchase Stages?," Management Science, INFORMS, vol. 67(1), pages 524-546, January.
    16. Simon P. Anderson & Bruno Jullien, 2015. "The advertising-financed business model in two-sided media markets," Post-Print hal-02866192, HAL.
    17. Dokyun Lee & Kartik Hosanagar, 2019. "How Do Recommender Systems Affect Sales Diversity? A Cross-Category Investigation via Randomized Field Experiment," Service Science, INFORMS, vol. 30(1), pages 239-259, March.
    18. Jidong Zhou, 2020. "Improved Information in Search Markets," Cowles Foundation Discussion Papers 2264R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    19. Alexandre de Cornière, 2016. "Search Advertising," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 156-188, August.
    20. Shen, Bo & Wright, Julian, 2019. "Why (don’t) firms free ride on an intermediary’s advice?," International Journal of Industrial Organization, Elsevier, vol. 64(C), pages 27-54.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:42:y:2023:i:2:p:360-376. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.