Impact of Rankings and Personalized Recommendations in Marketplaces

TL;DR

This paper models how public rankings and personalized recommendations influence decision-making in marketplaces with different supply constraints, highlighting their varying effectiveness based on preference heterogeneity and capacity limits.

Contribution

It introduces a stylized model analyzing the differential impact of rankings and recommendations in constrained and unconstrained marketplaces, emphasizing the role of preference heterogeneity.

Findings

Public rankings benefit homogeneous preferences in unconstrained settings.

Personalized recommendations are crucial with high preference heterogeneity.

In constrained settings, personalized recommendations significantly improve welfare.

Abstract

Individuals often navigate several options with incomplete knowledge of their own preferences. Information provisioning tools such as public rankings and personalized recommendations have become central to helping individuals make choices, yet their value proposition under different marketplace environments remains unexplored. This paper studies a stylized model to explore the impact of these tools in two marketplace settings: uncapacitated supply, where items can be selected by any number of agents, and capacitated supply, where each item is constrained to be matched to a single agent. We model the agents utility as a weighted combination of a common term which depends only on the item, reflecting the item's population level quality, and an idiosyncratic term, which depends on the agent item pair capturing individual specific tastes. Public rankings reveal the common term, while personalized recommendations reveal both terms. In the supply unconstrained settings, both public rankings and personalized recommendations improve welfare, with their relative value determined by the degree of preference heterogeneity. Public rankings are effective when preferences are relatively homogeneous, while personalized recommendations become critical as heterogeneity increases. In contrast, in supply constrained settings, revealing just the common term, as done by public rankings, provides limited benefit since the total common value available is limited by capacity constraints, whereas personalized recommendations, by revealing both common and idiosyncratic terms, significantly enhance welfare by enabling agents to match with items they idiosyncratically value highly. These results illustrate the interplay between supply constraints and preference heterogeneity in determining the effectiveness of information provisioning tools, offering insights for their design and deployment in diverse settings.