Recommender System Rethink: Implications for an Electronic Marketplace with Competing Manufacturers
Authors: Li, Lusi; Chen, Jianqing; Raghunathan, Srinivasan
Journal: Information Systems Research (2018)
<jats:p> Recommender systems that inform consumers about their likely ideal products have become the cornerstone of e-commerce platforms that sell products from competing manufacturers. Using a model of an electronic marketplace in which two competing manufacturers sell their products through a common retail platform, we study the effect of recommender systems on the retail platform, manufacturers, consumer surplus, and social welfare. In our setting, consumers are differentiated with respect to their preference for the two products (locational differentiation) and awareness about the two products (informational differentiation). A recommender system selects the recommendation based on a recommendation score, which is a weighted sum of expected retailer profit and expected consumer value. We find that the recommender system may benefit or hurt the retailer and the manufacturers depending on the signs and magnitudes of the substitution effect and demand effect of the recommender system. The substitution effect of the recommender system either intensifies or softens the price competition between two manufacturers through two forces—its direct influence alters the informational diffe…