Recommendation Power and Competition

A firm may decide to make total-surplus-reducing purchase recommendations in response to consumer heterogeneity in an experience good setting. First, we show under which conditions the firm chooses to make such biased recommendations in a monopoly setting. Second, we propose a duopoly model with differentiated products in which single-product firms compete in uniform prices and recommendation policies. We provide conditions under which both firms choose to bias their recommendations, whereas the bias would be absent if products were more differentiated or one of the two products were withdrawn from the market.