In recent years, progresses in data mining and business analytics have fostered the advent of recommender systems, behavioral advertising, and other ways of using consumer data to personalize offers and products. We investigate the incentives for sellers to invest in systems that allow the tracking of consumers and then to truthfully report whether potential buyers will enjoy yet untried products. We find that there are two types of equilibria: For some parameter values, sellers will target all potential buyers, hence their targeted ads or purchase recommendations provide no benefit to the consumer. But for other values, ads and recommendations will be accurate. In particular, the incentive for the seller to provide accurate ads and recommendations will be inversely related to the difference between the cost of producing the good and its average market evaluation.
Review of Industrial Organization – Springer Journals
Published: Nov 30, 2013
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