Selling with Recommender Systems and Price Dynamics

Abstract

A long-lived seller sells a product of unknown value through a recommender system that offers prices and recommends products to short-lived consumers in continuous time. The seller receives feedback about the product at a rate that increases with the instantaneous sales volume. The optimal selling mechanism is characterized by information cutoffs, which are derived recursively using a characteristic function. In the optimal mechanism, below-cost pricing can occur during an initial period or an interim period, and price cycles may emerge. In this market, restrictions on either prices or recommendation strategies lead to Pareto-inferior outcomes.

Keywords: Dynamic pricing, information design, product recommendation, consumer feedback, below-cost pricing, price cycle

JEL Classification: D82, D83, L12