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Inflated Recommendations

Author

Listed:
  • Martin Peitz
  • Anton Sobolev

Abstract

Biased recommendations arise naturally in a market with heterogeneous consumers: A seller o ers a product to a mix of "picky" and "flexible" consumers who can purchase through an intermediary or directly from the seller. A picky consumer either encounters a good or a bad match, while a "flexible" consumer is indifferent about the product design. Consumers know whether they are picky or flexible, but picky consumers observe match quality only after purchase and, therefore, rely on the intermedi- ary's recommendation. We provide conditions under which the intermediary decides to recommend a welfare-reducing bad match with positive probability, resulting in inflated recommendations. A regula- tory intervention that prohibits recommending bad matches may backfire. The optimal regulation that limits the rate at which the product can be recommended performs better than the laissez-faire.

Suggested Citation

  • Martin Peitz & Anton Sobolev, 2022. "Inflated Recommendations," CRC TR 224 Discussion Paper Series crctr224_2022_336, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2022_336
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp336
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    Cited by:

    1. Federico Etro, 2023. "Hybrid Marketplaces with Free Entry of Sellers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(2), pages 119-148, March.
    2. Gambato, Jacopo & Sandrini, Luca, 2023. "Not as good as it used to be: Do streaming platforms penalize quality?," ZEW Discussion Papers 23-032, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    intermediation; digital platforms; recommendation bias; recommender system; asymmetric information; experience good; e-commerce;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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