Pay for Play: Sponsored Recommendations in Information Gatekeepers

38 Pages Posted: 16 May 2005

See all articles by Hemant K. Bhargava

Hemant K. Bhargava

University of California, Davis

Juan Feng

University of Florida - Warrington College of Business Administration

Date Written: February 25, 2006

Abstract

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.

Keywords: Information gatekeeper, sponsorship revenue, competition

Suggested Citation

Bhargava, Hemant K. and Feng, Juan, Pay for Play: Sponsored Recommendations in Information Gatekeepers (February 25, 2006). Available at SSRN: https://ssrn.com/abstract=721243 or http://dx.doi.org/10.2139/ssrn.721243

Hemant K. Bhargava

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Juan Feng (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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