The Value of Recommendations

Jeanine Miklos-Thal
Heiner Schumacher

Abstract

We analyze the repeated interaction between a firm, short-lived consumers, and a monitor that sells recommendations about the firm to consumers. In each period, the monitor decides whether to recommend the firm, the current consumer decides whether to purchase the recommendation and whether to buy from the firm, and the firm decides whether to exert high effort to provide quality. We show that, in a broad range of settings, the monitor's desire to maximize the value of its recommendations to consumers is in conflict with (constrained) efficient effort provision by the firm.