Word of Mouth and Recommender Systems: A Theory of the Long Tail
I present a model to assess the extent to which recommender systems can account for the "long tail", an increase in the tail of the sales distribution. Consumers face a search problem within a pool of horizontally differentiated products supplied by a monopolist. They are endowed with a taste profile that determines their probability of matching with any given product, but arrive to the market uninformed and cannot identify which products are more likely to yield a match. Consumers may search for a match by drawing products from the assortment or by seeking word of mouth recommendations from other consumers. Product evaluations prior to purchase and the exchange of recommendations are both shown to arise endogenously, increasing firm profits and the concentration of sales. Introducing a recommender system to act as an intermediary in the recommendations exchange further increases firm profits and affects sales concentration. Insights are derived on the mechanisms driving concentration in artistic markets and their implications for the long tail debate. The model is suited for experience good markets such as music, cinema, literature and video game entertainment.