The Value of Recommendations
33 Pages Posted: 2 Dec 2010 Last revised: 22 Oct 2012
Date Written: October 20, 2012
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: Suggested Citation