Online retailer recommender systems: a competitive analysis

Abstract

As thriving and fast-moving technologies, recommender systems have been widely adopted by online retailers to increase their sales recently. This has significant impacts on the stakeholders in the online supply chain. How an online retailer uses recommender systems to maximise its profit through choosing different recommendation strategies for two upstream competing manufacturers is explored in this paper. In particular, a game between one online retailer and two competitive manufacturers is constructed in which these manufacturers can be selectively and strategically recommended by the retailer. The analytical results show that as the recommendation strength of recommender systems increases, neither manufacturers nor the retailer can always enjoy higher profits, which is counterintuitive. Furthermore, this study reveals that (i) a recommended manufacturer may enjoy a higher profit through sharing the recommendation market with its rival than through monopolising this market; (ii) recommending two manufacturers in both is the most feasible way for the online retailer to benefit from controlling the supply chain. Finally, it is interesting that recommender systems are found to be good mechanisms to help to coordinate the online supply chain with one retailer and two manufacturers because the recommendation market generated by recommender systems alleviates channel conflict.

Keywords:

• recommender systems
• online retailer
• channel coordination
• game theory
• recommendation strength

Acknowledgements

The authors would like to thank four anonymous referees very much for their constructive comments and valuable suggestions that substantially helped improve the quality and presentation of this paper.