Recommenders’ Originals: The Welfare Effects of the Dual Role of Platforms as Producers and Recommender Systems

Abstract

We study a model of strategic interaction between producers and a monopolist platform that employs a recommendation system. We characterize the consumer welfare implications of the platform’s entry into the production market. Upon entry, the platform biases recommendations to steer consumers towards its own goods, which leads to equilibrium investment adjustments by the producers and lower consumer welfare when the platform’s market size is large. Furthermore, we find that a policy separating recommendation and production or imposing unbiased recommendations is not always welfare improving. Our results highlight the ability of platforms to foreclose competition through the use of biased recommender systems.