Inflated Recommendations

Abstract

Biased recommendations arise naturally in a market with heterogeneous consumers: a seller oers a product to a mix of consumers who can purchase through an intermediary or directly from a seller. \Picky" consumers are uncertain about match quality, which they observe only after purchase, while \ exible" consumers are always happy with the match. Therefore, picky consumers rely on the intermediary's recommendation. We provide conditions under which the intermediary will recommend a welfarereducing bad match with positive probability, resulting in in ated recommendations. Regulatory interventions may lead to higher social welfare. However, a regulatory intervention that prohibits recommending bad matches may backre.