Efficient Recommender Systems

5 Pages Posted: 19 Jul 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: June 2006

Abstract

We study the efficient allocation of buyers 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 generates informational externalities. We investigate the impact of these factors on the efficient allocation of buyers across different products.

We find that the efficient allocation requires that the seller with the recommender system has full market share. If the recommender system is sufficiently effective in reducing uncertainty, it is optimal to have some products to be purchased by a larger group of people than others. The large group consists of customers with flexible tastes.

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

JEL Classification: D42, D83, D85

Suggested Citation

Bergemann, Dirk and Ozmen, Deran, Efficient Recommender Systems (June 2006). Cowles Foundation Discussion Paper No. 1568. Available at SSRN: https://ssrn.com/abstract=917898

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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