Selling with Recommender Systems and Price Dynamics

Abstract

A long-lived seller sells a new 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 profit-maximizing selling mechanism features episodes of price discounts, during which the seller discontinuously lowers the price and selectively sends out unwarranted recommendations to consumers. The optimal price path may involve delayed discounts, below-cost pricing, and price cycles.

Keywords: Dynamic pricing, information design, social learning.

JEL Classification: D82, D83, L12