Optimal pricing with recommender systems

Abstract 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 optimal pricing of different products for a seller with a recommender system in the presence of 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. Contents

• Type: Conference
• Year: 2006
• Where: SIGECOM
• Authors: Dirk Bergemann, Deran Ozmen
• Keywords: Optimal Pricing, Product Uncertainty, Recommender System, SIGECOM 2006