Empirical Analysis of the Business Value of Recommender Systems

40 Pages Posted: 24 Jan 2007

See all articles by Robert Garfinkel

Robert Garfinkel

University of Connecticut

Ram D. Gopal

University of Connecticut - Department of Operations & Information Management

Bhavik K. Pathak

Indiana University South Bend - School of Business and Economics

Rajkumar Venkatesan

University of Virginia - Darden School of Business

Fang Yin

University of Connecticut - Department of Operations & Information Management

Date Written: November 2006

Abstract

Online retailers are increasingly using information technologies to provide value added services to customers. Prominent examples of these services are online recommender systems and consumer feedback mechanisms that serve to reduce consumer search costs and uncertainty associated with the purchase of unfamiliar products. The central question we address is the business value of online recommender systems to online retailers. We develop a robust empirical method that incorporates indirect impact of recommendations on sales through retailer pricing, potential simultaneity between sales and recommendations, and a comprehensive measure of the strength of recommendations. Applying the model to a panel data set collected from two online retailers, we found that the strength of recommendations has a positive impact on sales. We also found empirical evidence for the reinforcing effect of sales on recommendations and for the positive impact of recommendations on prices. These results suggest that recommendations not only improve sales but also provide added flexibility to retailers to adjust their prices. A comparative analysis reveals that recommendations have a higher impact on sales than consumer feedback. Our study demonstrates the value provided by information technology to an online retailer and provides guidelines for integrating recommender systems into their overall marketing strategy.

Keywords: Recommender Systems, Digital Word of Mouth, Electronic Commerce, Collaborative Filtering, Experience Goods, System of Equations

Suggested Citation

Garfinkel, Robert and Gopal, Ram D. and Pathak, Bhavik K. and Venkatesan, Rajkumar and Yin, Fang, Empirical Analysis of the Business Value of Recommender Systems (November 2006). Available at SSRN: https://ssrn.com/abstract=958770 or http://dx.doi.org/10.2139/ssrn.958770

Robert Garfinkel

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Ram D. Gopal

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Bhavik K. Pathak

Indiana University South Bend - School of Business and Economics ( email )

PO Box 7111
1700 Mishawaka Avenue
South Bend, IN 46634
United States
574-520-4614 (Phone)

Rajkumar Venkatesan

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5808

Fang Yin (Contact Author)

University of Connecticut - Department of Operations & Information Management

2100 Hillside Rd
Storrs, CT 06269-1041
United States

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