Competing for recommendations: The strategic impact of personalized product recommendations in online marketplaces (vol 42, pg 360, 2023)

Summary: This study examines the impact of personalized product recommendations and consumer profiling accuracy on competition among third-party sellers and market outcomes in an online marketplace. Findings show that as the marketplace accurately predicts consumer preferences, the equilibrium price initially decreases and then increases, resulting in potential decreases in both marketplace and seller profits despite improved recommendation accuracy. Additionally, recommending the most profitable products for each recommendation may reduce profits for both the marketplace and sellers, and the marketplace can benefit by excluding pricing information to prevent recommendation competition. Surprisingly, regulations prohibiting recommendations from considering profit margin information could lead to higher prices and ultimately harm consumers. These results are driven by competing sellers' incentives to compete for recommendations, target specific consumers, and undercut rivals' prices. The study also finds that these insights hold qualitatively true even if the marketplace recommends products based on consumer surplus, resulting in lower equilibrium prices. Various extensions further confirm the robustness of these results.