Informative Role of Recommender Systems in Electronic Marketplaces: A Boon or a Bane for Competing Sellers
Authors: Li, Lusi; Chen, Jianqing; Raghunathan, Srinivasan
Journal: MIS Quarterly (2020)
<jats:p>Recommender systems have become the cornerstone of electronic marketplaces that sell products from competing sellers. Similar to traditional advertising, recommender systems can introduce consumers to new products and increase the market size which benefits sellers. This informative role of recommender systems in electronic marketplaces seems attractive to sellers because sellers do not pay the marketplaces for receiving recommendations. We show that in a marketplace that deploys a recommender system helping consumers discover the product that provides them the highest expected net utility, sellers do not necessarily benefit from the “free” exposure provided by the recommender system. The impacts of the recommender system are the result of a subtle interaction between advertising effect and competition effect. The advertising effect causes sellers to advertise less on their own and the competition effect causes them to decrease prices in the presence of a recommender system. Essentially, sellers “pay” in the form of more intense price competition because of the recommender system. Furthermore, the competition effect is exacerbated by the advertising effect because the reco…