An Economic Analysis of Product Recommendation in the Presence of Quality and Taste-Match Heterogeneity

Abstract

Platform-provided recommendation is ubiquitous in online markets. This paper analyzes the equilibrium implications of platform recommendation as an intervention that shifts (a portion of) consumer search effort and demand from the rest of the market to the recommended products. Our analysis provides the theoretical basis for determining which types of products the platform should recommend to optimize total producer profits or consumer surplus. We find that the quality and taste-dispersion dimensions can interact to affect the overall effectiveness of product recommendation strategies, and, in general, recommendation strategies based on observed price or sales signals cannot guarantee the optimal outcome.