The Value of Recommendations

33 Pages Posted: 2 Dec 2010 Last revised: 22 Oct 2012

See all articles by Jeanine Miklós-Thal

Jeanine Miklós-Thal

University of Rochester - Simon Business School

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: October 20, 2012

Abstract

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2164774

Many markets without repeated seller-buyer relations feature third-party "monitors" that sell recommendations. We analyze the profit-maximizing recommendation policies of such monitors. In an infinitely repeated game with seller moral hazard and short-lived consumers, a monopolistic monitor with superior information about the seller's past effort decisions sells recommendations about the seller to consumers. We show that the monitor has an incentive to make its recommendations hard to predict, which in general leads to inefficient effort provision by sellers. These results hold under perfect and imperfect monitoring and in a variety of informational setting. When there are multiple competing sellers, the conflict between the monitor's profit-maximization objective and efficient effort provision is mitigated.

Keywords: Repeated Games, Moral Hazard, Imperfect Monitoring, Information Sellers

JEL Classification: C73, D83, L15

Suggested Citation

Miklós-Thal, Jeanine and Schumacher, Heiner, The Value of Recommendations (October 20, 2012). Simon School Working Paper No. FR 11-08. Available at SSRN: https://ssrn.com/abstract=1718474 or http://dx.doi.org/10.2139/ssrn.1718474

Jeanine Miklós-Thal (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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