Publication Date: June 2006
We study the eﬀicient allocation of buyers in the presence of recommender systems. A recommender system aﬀects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be oﬀered as add-ons, which generates informational externalities. We investigate the impact of these factors on the eﬀicient allocation of buyers across diﬀerent products.
We ﬁnd that the eﬀicient allocation requires that the seller with the recommender system has full market share. If the recommender system is suﬀiciently eﬀective in reducing uncertainty, it is optimal to have some products to be purchased by a larger group of people than others. The large group consists of customers with flexible tastes.
Recommender system, Collaborative ﬁltering, Add-ons, Pricing, Information externality
JEL Classification Codes: D42, D83, D85