An Economic Analysis of Product Recommendation in the Presence of Quality and Taste-Match Heterogeneity
32 Pages Posted: 30 Oct 2017 Last revised: 10 Feb 2019
Date Written: February 1, 2019
This paper investigates how a digital platform should select products for recommendation to meet different objectives. Specifically, we analyze a model of platform-based market where consumers search and purchase products that potentially differ in quality and taste dispersion. Our modeling framework elucidates how platform recommendation influences the market-level equilibrium outcomes, thereby in- forming the optimal recommendation strategy in the presence of product heterogeneity. We find that the quality and taste-dispersion dimensions can interact to affect the overall effectiveness of product recommendation strategies. Conditioning on taste dispersion, recommending high quality products in- creases both producer profits and consumer surplus. Conditioning on quality, recommending high taste- dispersion products may, however, increase or decrease producer profits depending on the joint effect of profit margin and purchase probability. The direction of change in consumer surplus is also un- certain—recommending a high taste-dispersion product is more likely to increase (decrease) consumer surplus if the quality is low (high). Importantly, we show that when the platform cannot discern product types, recommendation strategies based on observed price or sales signals cannot guarantee the optimal outcome in the general case.
Keywords: platform recommendation, consumer search, market equilibrium, recommendation strategy, platform economics
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