A Theory of "Likes"

TL;DR

This paper develops a theoretical framework to analyze how recommendation systems influence consumer demand and welfare, considering preference heterogeneity and the differing objectives of welfare maximization versus profit maximization.

Contribution

It introduces a model that explains the impact of recommendation channels on economic information dissemination and compares welfare- and profit-maximizing system designs.

Findings

Recommendation systems can significantly alter consumer demand.

Welfare-maximizing recommendations may differ from profit-driven strategies.

The analysis highlights the importance of system design in economic outcomes.

Abstract

This paper investigates the value of recommendations for disseminating economic information, with a focus on frictions resulting from preference heterogeneity. We consider Bayesian expected-payoff maximizers who receive non-strategic recommendations by other consumers. We show by which channels a recommendation system influences consumer demand and welfare. Our analysis reveals how the welfare-maximizing design of a recommendation system may differ from what a profit-maximizing designer would choose to do.