How Beneficial are Recommendations to Consumers? Estimates of Relative Benefits of Product Recommendations to Consumers and Retailers
31 Pages Posted: 17 Nov 2020 Last revised: 8 Jan 2021
Date Written: October 1, 2020
Do personalized offerings enabled by big data only bring economic benefits to firms but not to consumers? In this paper, we seek to address this question by examining a particular category of personalized offerings provided by algorithmic product recommendation systems. While the economic value of algorithmic product recommendations to firms is mostly understood, their benefits to consumers are not well quantified in the literature. We conduct a randomized field experiment on an apparel retailer’s website in the US to estimate the benefits of recommendations to consumers. We find that recommendations helped consumers discover lower-priced products on the website, which results in a higher probability of product purchase (lower likelihood of failed search efforts) and a lower price of purchased products. Specifically, an additional recommended product page view due to recommendations leads to a 15 percent increase in purchase probability and a $1.59 decrease in the purchase price. The product recommendations are particularly beneficial to consumers for product categories with a higher relative price dispersion and a higher proportion of niche products. Due to these benefits, consumers substitute 0.14 keyword search page views and 0.63 product category page views for each recommended product page view under recommendations. The recommendations generated a surplus of $56,631 (3.8 percent of the total sales), two-thirds of which the retailer captured as additional revenue, and the remaining one-third the consumers as price savings.
Keywords: Product recommendations; Economic value of recommendations; Search costs; Consumer surplus; Randomized experiment
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