Inflated Recommendations

Martin Peitz and Anton Sobolev ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Biased recommendations arise naturally in markets with heterogeneous consumers. We study a model in which a monopolist offers an experience good to a population of consumers with heterogeneous tastes and makes personalized purchase recommendations. We provide conditions under which a firm makes welfare-reducing purchase recommendations with positive probability, resulting in inflated recommendations. We extend this insight to a setting in which an intermediary makes the recommendations, whereas a seller sets the retail price. Regulatory interventions that forbid inflated recommendations may lead to higher social welfare or may backfire.

Keywords: recommendation bias; recommender system; asymmetric information; experience good; intermediation (search for similar items in EconPapers)
JEL-codes: D21 D42 L12 L15 M37 (search for similar items in EconPapers)
Pages: 53
Date: 2024-03
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
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Working Paper: Inflated recommendations (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2022_336v2

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