Optimal Pricing with Recommender Systems
We study optimal pricing 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 generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is suﬀiciently eﬀective in reducing uncertainty, then the seller prices otherwise symmetric products diﬀerently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations.
Bergemann, Dirk and Ozmen, Deran, "Optimal Pricing with Recommender Systems" (2006). Cowles Foundation Discussion Papers. 1853.