Recommendations with Feedback
33 Pages Posted: 26 Mar 2019
Date Written: February 26, 2019
We investigate the strategic role of a recommender who cares about accuracy and whose recommendations influence product quality. In the presence of such feedback effects, recommendations have a self-fulling property: the recommendation agent can select any firm which will end up being the firm with the best quality. Recommendations can lead to significant inefficiencies which include: i) a lack of incentive to acquire valuable information, ii) a status quo bias, and iii) the avoidance of risky innovations. Direct monetary payments from firms may work in mitigating these inefficiencies, while competition between recommenders and monetary transfers from consumers are ineffective.
Keywords: Recommendation, Feedback, Coordination
JEL Classification: D80
Suggested Citation: Suggested Citation