Inflated recommendations

Martin Peitz and Anton Sobolev

No 17260, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Biased recommendations arise naturally in a market with heterogeneous consumers: a seller offers a product to a mix of consumers who can purchase through an intermediary or directly from a seller. "Picky" consumers are uncertain about match quality, which they observe only after purchase, while "flexible" consumers are always happy with the match. Therefore, picky consumers rely on the intermediary's recommendation. We provide conditions under which the intermediary will recommend a welfare-reducing bad match with positive probability, resulting in inflated recommendations. Regulatory interventions may lead to higher social welfare. However, a regulatory intervention that prohibits recommending bad matches may backfire.

Keywords: Intermediation; Digital platforms; Recommendation bias; Recommender system; Asymmetric information; Experience good; E-commerce (search for similar items in EconPapers)
JEL-codes: D21 D42 L12 L15 M37 (search for similar items in EconPapers)
Date: 2022-04
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Working Paper: Inflated Recommendations (2024)
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