Recommenders’ Originals: The Welfare Effects of the Dual Role of Platforms as Producers and Recommender Systems

58 Pages Posted: 24 Sep 2021 Last revised: 18 Apr 2022

See all articles by Guy Aridor

Guy Aridor

Northwestern University - Kellogg School of Management

Duarte Gonçalves

University College London - Department of Economics; Columbia University

Date Written: August 12, 2021

Abstract

We study a model of strategic interaction between a producer and a platform that employs a recommendation system, following an information design approach. Upon entry into the production market, the platform biases recommendations to credibly steer consumers towards its own goods. Despite the increased upstream competition, platform entry and self-preferencing can decrease consumer welfare and result in foreclosure of the independent producer. We then consider the natural policy remedy of separating recommendation and production or imposing unbiased recommendations and find it leads to welfare gains if the platform’s revenue potential is large enough, but to significant welfare losses when it is not. The ambiguity of such a policy’s welfare implications and the dependence on the industry’s returns highlights the importance of targeted restrictions on platform self-preferencing.

Keywords: Recommender System; Biased Intermediation; Upstream Entry; Information Design; Self-referencing

JEL Classification: L11; L42; D83; L81

Suggested Citation

Aridor, Guy and Gonçalves, Duarte and Gonçalves, Duarte, Recommenders’ Originals: The Welfare Effects of the Dual Role of Platforms as Producers and Recommender Systems (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3928005 or http://dx.doi.org/10.2139/ssrn.3928005

Guy Aridor (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Duarte Gonçalves

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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