Pay for Play: Sponsored Recommendations in Information Gatekeepers
Hemant K. Bhargava
University of California, Davis
University of Florida - Warrington College of Business Administration
February 25, 2006
This article studies the inclusion of sponsored results in recommendations, observed in many information gatekeepers including Internet search engines, travel experts, credit raters, radio deejays, and movie critics, which are an essential entry point for many information search and decision making tasks. We develop and analyze a tractable model in which consumers may prefer or dislike the use of sponsored results in the recommendations, merchants' value for sponsorship increases with the gatekeeper's user base, and when there are negative externalities among merchants competing for consumers' attention. The optimal strategy strikes a balance between sponsorship revenues from merchants and user-based revenues. The gatekeeper's profit maximizing choice of sponsored results will, in general, deviate from the ideal level for users (which may be none, all or some, depending on the gatekeeper's technological quality and other factors). Competition among gatekeepers will cause them to make sponsorship more exclusive, which may either increase or decrease the deviation. The gatekeeper may employ sponsored recommendations even when doing so is detrimental to users, or may not present enough sponsored results even when these improve the quality of recommendations. Product innovations or better domain expertise give the gatekeeper greater flexibility in using sponsored results. Innovation by one gatekeeper has positive effect on consumer surplus as long as it does not create substantial imbalance or monopoly power. Consumer interest might be hurt if gatekeepers coordinate in setting the mix of sponsored results.
Number of Pages in PDF File: 38
Keywords: Information gatekeeper, sponsorship revenue, competitionworking papers series
Date posted: May 16, 2005
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