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
Date Written: August 12, 2021
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: Suggested Citation