To adopt an online recommender system? A manufacturer’s strategic choice in a dual-channel setting

Abstract

The past years have witnessed the prosperity of online recommender systems. Some firms have utilized such systems to promote their products and services whereas others have not. To reveal the motivation to use recommender systems, we consider a dual channel setting in which a manufacturer sells his products to consumers in a direct-sale channel and also uses a wholesale channel to sell via an online retailer. The manufacturer decides on whether to use an online recommender system in the direct-sale channel or not, for both the case of the retailer’s adoption of the recommendation system and the case of no recommendation in the wholesale channel. Considering both the cost-per-sale (CPS) and cost-per-click (CPC) payment schemes in the context of the recommender system, we examine whether it is optimal for the manufacturer to adopt the recommendation service under two distinct scenarios: when the retailer utilizes the recommender system and when the retailer does not. Our game-theoretic analysis exposes that, if the retailer does not adopt the recommender system under both the CPS and CPC payment schemes, then the manufacturer’s system adoption decision depends on the recommendation strength and cost. We also find that the manufacturer can benefit from the CPS payment with a sufficiently low recommendation cost. When the retailer adopts the recommender system, the manufacturer’s optimal strategy is to abandon the recommender system under any payment scheme, and the manufacturer reduces his wholesale price when the recommendation strength increases.