Recommended for you: Role, impact of tools behind

automated product picks explored

Pros, cons of recommender systems
Date:

March 4, 2021

Source:

University of Texas at Dallas

Summary:

Researchers examined the role and economic impacts of recommender systems, and how
they affect consumers' decisions.

    
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As you scroll through Amazon looking for the perfect product, or flip through
titles on Netflix searching for a movie to fit your mood, auto-generated
recommendations can help you find exactly what you're looking for among
extensive offerings.

These recommender systems are used in retail, entertainment, social networking and more. In a
recently published study, two researchers from The University of Texas at Dallas investigated the
informative role of these systems and the economic impacts on competing sellers and consumers.
"Recommender systems have become ubiquitous in e-commerce platforms and are touted as sales-
support tools that help consumers find their preferred or desired product among the vast variety of
products," said Dr. Jianqing Chen, professor of information systems in the Naveen Jindal School of
Management. "So far, most of the research has been focused on the technical side of recommender
systems, while the research on the economic implications for sellers is limited."
In the study, published in the December 2020 issue of MIS Quarterly, Chen and Dr. Srinivasan
Raghunathan, the Ashbel Smith Professor of information systems, developed an analytical model in
which sellers sell their products through a common electronic marketplace.
The paper focuses on the informative role of the recommender system: how it affects consumers'
decisions by informing them about products about which they otherwise may be unaware.
Recommender systems seem attractive to sellers because they do not have to pay the marketplace
for receiving recommendations, while traditional advertising is costly.
The researchers note that recommender systems have been reported to increase sales on these
marketplaces: More than 35% of what consumers purchase on Amazon and more than 60% of what
they watch on Netflix result from recommendations. The systems use information including purchase
history, search behavior, demographics and product ratings to predict a user's preferences and
recommend the product the consumer is most likely to buy.
While recommender systems introduce consumers to new products and increase the market size --
which benefits sellers -- the free exposure is not necessarily profitable, Chen said.
The researchers found the advertising effect causes sellers to advertise less on their own, and the
competition effect causes them to decrease their prices. Sellers also are more likely to benefit from
the recommender system only when it has a high precision.
"This means that sellers are likely to benefit from the recommender system only when the
recommendations are effective and the products recommended are indeed consumers' preferred
products," Chen said.
The researchers determined these results do not change whether sellers use targeted advertising or
uniform advertising.
Although the exposure is desirable for sellers, the negative effects on profitability could overshadow
the positive effects. Sellers should carefully choose their advertising approach and adopt uniform
advertising if they cannot accurately target customers, Chen said.
"Free exposure turns out to not really be free," he said. "To mitigate such a negative effect, sellers
should strive to help the marketplace provide effective recommendations. For example, sellers
should provide accurate product descriptions, which can help recommender systems provide better
matching between products and consumers."
Consumers, on the other hand, benefit both directly and indirectly from recommender systems,
Raghunathan said. For example, they might be introduced to a new product or benefit from price
competition among sellers.
Conversely, they also might end up paying more than the value of such recommendations in the
form of increased prices, Raghunathan said.
"Consumers should embrace recommender systems," he said. "However, sharing additional
information, such as their preference in the format of online reviews, with the platform is a double-
edged sword. While it can help recommender systems more effectively find a product that a
consumer might like, the additional information can be used to increase the recommendation
precision, which in turn can reduce the competition pressure on sellers and can be bad for
consumers."
The researchers said that although significant efforts are underway to develop more sophisticated
recommender systems, the economic implications of these systems are poorly understood.
"The business and societal value of recommender systems cannot be assessed properly unless
economic issues surrounding them are examined," Chen said. He and Raghunathan plan to conduct
further research on this topic.
Lusi Li PhD'17, now at California State University, Los Angeles, also contributed to the research.
The project was part of Li's doctoral dissertation at UT Dallas.