Paper on the Welfare Properties of Profit Maximizing Recommender Systems Conditionally Accepted at MISQ

My paper on the welfare properties of recommender systems that maximize profit, with Xiaochen Zhang, Miguel Matos and Rodrigo Belo, has been conditionally accepted for publication at MISQ. This paper shows conditions under which the recommender system that maximizes profit hurts consumers. Essentially, consumers seem to exhibit a lower price elasticity of demand for items placed in salient slots irrespective of their underlying quality. Armed with this knowledge, firms may strategically place products with higher margins in such slots earning more profit and reducing consumer surplus. We show results from a randomized field experiment allowing us to measure the magnitude of these effects using the video on demand system of a large VoD provider. We also discuss how repeated interaction with the recommender system may be insufficient to address the loss in consumer surplus.