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Inflated recommendations

Author

Listed:
  • Peitz, Martin
  • Sobolev, Anton

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.

Suggested Citation

  • Peitz, Martin & Sobolev, Anton, 2022. "Inflated recommendations," CEPR Discussion Papers 17260, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17260
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    Keywords

    Intermediation; Digital platforms; Recommendation bias; Recommender system; Asymmetric information; Experience good; E-commerce;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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