Optimal Pricing with Recommender Systems

Dirk Bergemann and Deran Ozmen
Additional contact information
Deran Ozmen: Boston Consulting Group

No 1563, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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 (search for similar items in EconPapers)
JEL-codes: D42 D83 D85 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2006-03
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt and nep-net
Note: CFP 1177
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in Proceedings of the 7th ACM Conference on Electronic Commerce, Ann Arbor, MI, 2006, pp. 43-51

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