Inflated Recommendations

95 Pages Posted: 27 May 2022

See all articles by Martin Peitz

Martin Peitz

University of Mannheim; Centre for Economic Policy Research (CEPR)

Anton Sobolev

University of Mannheim

Date Written: April 1, 2022

Abstract

Biased recommendations arise naturally in a market with heterogeneous consumers: a seller offers a product to a mix of consumers who can purchase through an intermediary or directly from a seller. "Picky" consumers are uncertain about match quality, which they observe only after purchase, while "flexible" consumers are always happy with the match. Therefore, picky consumers rely on the intermediary's recommendation. We provide conditions under which the intermediary will recommend a welfare-reducing bad match with positive probability, resulting in inflated recommendations. Regulatory interventions may lead to higher social welfare. However, a regulatory intervention that prohibits recommending bad matches may backfire.

Keywords: Asymmetric information, Digital Platforms, E-commerce, experience good, intermediation, recommendation bias, recommender system

JEL Classification: D21, D42, L12, L15, M37

Suggested Citation

Peitz, Martin and Sobolev, Anton, Inflated Recommendations (April 1, 2022). CEPR Discussion Paper No. DP17260, Available at SSRN: https://ssrn.com/abstract=4121443

Martin Peitz (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anton Sobolev

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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