266 / 2024-04-23 21:22:32

Recommender Systems and Vertically Differentiated New Product Introductions

platform economics,recommender systems,product introduction,competitive strategy,channel structure

Recommender systems are prevalent on online retail platforms, and they are valuable in helping consumers discover new products. This paper examines the introductions of new product on a platform and the strategic impacts of recommender systems. We develop a game-theoretic model to consider a market under two scenarios, pre-introduction and post-introduction, where the recommender system is run by a platform based on consumers’ quality preferences. Comparing different selling formats under two scenarios, we find the platform does not always welcome higher quality products when making the product introduction decision. With agency selling adopted, only when quality advantage of the new product is substantial will the platform introduce new products to the market, though introducing higher quality products makes consumers better off. With the presence of recommender systems, the quality advantage required to ensure product introduction is slighter. When reselling is adopted, the platform always prefers product introduction. The role of recommender systems after introduction is making the platform and the manufacturer offering higher product quality earn more profits, while the manufacturer offering the lower earns less. Recommender systems raise consumer surplus in both selling formats with not extreme recommendation precision. As recommendation precision increases, consumer surplus in different selling formats varies in opposite directions. Pros and cons exist in both online selling formats. As the commission rate increases, ceteris paribus, manufacturers will switch from agency selling to reselling when the commission rate exceeds a threshold, and vice versa for the platform.