Personalized product recommendations and firm performance

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Basu , S 2021 , ' Personalized product recommendations and firm performance ' , Electronic Commerce Research and Applications , vol. 48 , 101074 .

Title: Personalized product recommendations and firm performance
Author: Basu, Shreya
Contributor organization: Economics
Faculty of Social Sciences
Date: 2021
Language: eng
Number of pages: 11
Belongs to series: Electronic Commerce Research and Applications
ISSN: 1567-4223
Abstract: This paper investigates the incentives of e-commerce platforms to show personalized recommendations and its effects on performance. A theoretical framework is developed that characterizes the optimal decision policy of a firm, given current state of shoppers. The key finding is that the firm must always show recommendations to shoppers in the high state above a certain price or value threshold. In the low state, recommending is optimal if the "salience effect" is above a threshold that maximizes discounted future stream of profits. An empirical model provides support to the theoretical findings, highlighting the reputation effects of personalized recommendations, using browsing and purchase data from a Finnish multi-product platform. While recommendations are associated with a 29% increase in firm revenue, relevance of such recommendations potentially boost revenue by a significant 30%. Furthermore, strong evidence is presented that consumer state is endogenous in firm revenue regressions. A three-step IV process extracts the direct effect of consumer state on revenue which shows positive association between reputation effects and firm performance.
Subject: e-commerce
personalized recommendations
reputation effects
113 Computer and information sciences
511 Economics
512 Business and Management
Peer reviewed: Yes
Rights: cc_by_nc_nd
Usage restriction: openAccess
Self-archived version: publishedVersion

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