Optimal Pricing with Recommender Systems

13 Pages Posted: 31 Mar 2006

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Deran Ozmen

Yale University

Date Written: March 2006

Abstract

We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system.

If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations.

Keywords: Recommender system, Collaborative filtering, Add-ons, Pricing, Information externality

JEL Classification: D42, D83, D85

Suggested Citation

Bergemann, Dirk and Ozmen, Deran, Optimal Pricing with Recommender Systems (March 2006). Cowles Foundation Discussion Paper No. 1563. Available at SSRN: https://ssrn.com/abstract=894293

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Deran Ozmen

Yale University ( email )

New Haven, CT 06520
United States

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