Selling on Recommender Platforms: Demand Boost Versus Customer Migration

Platforms that provide product recommendations to consumers, such as marketplaces like Amazon or online travel agencies like Expedia, govern a substantial part of transactions in many markets. In addition to selling via platforms, most firms, however, also operate a direct channel. This paper investigates how the interaction between the platform channel and the firms’ direct channel affects platform design and firms' pricing incentives. We provide a rich game-theoretic model in which platforms give recommendations to consumers about products with high match value and facilitate consumer search, but charge sellers commission rates, whereas sellers compete in prices to balance demand across both channels. We show that the interaction between the channels gives rise to novel mechanisms that have counterintuitive effects. First, higher platform fees induce sellers to prioritize their direct channel—where consumers have lower expected match values and are thus more price-sensitive—leading to lower equilibrium prices. Second, improvements in recommendation quality can paradoxically reduce seller prices by intensifying the competitive pressure on the direct channel. Third, we show that for the platform, the quality of recommendations and the commission rate are strategic substitutes, that is, providing better recommendations should optimally be coupled with lower commission rates. This occurs because both instruments have potentially negative effects on seller prices. Finally, we evaluate recent policy interventions within our framework. We find that fee caps and measures that facilitate transactions on the direct channel can have unintended consequences and reduce consumer surplus by distorting the pricing incentives inherent in the dual-channel structure.