Balancing Consumer and Business Value of Recommender Systems: A Simulation-based Analysis

Abstract

Automated recommendations can nowadays be found on many e-commerce platforms, and such recommendations can create substantial value for consumers and providers. Often, however, not all recommendable items have the same profit margin, and providers might thus be tempted to promote items that maximize their profit. In the short run, consumers might accept non-optimal recommendations, but they may lose their trust in the long run. Ultimately, this leads to the problem of designing balanced recommendation strategies, which consider both consumer and provider value and lead to sustained business success. This work proposes a simulation framework based on agent-based modeling designed to help providers explore longitudinal dynamics of different recommendation strategies. In our model, consumer agents receive recommendations from providers, and the perceived quality of the recommendations influences the consumers' trust over time. We design several recommendation strategies which either give more weight on provider profit or on consumer utility. Our simulations show that a hybrid strategy that puts more weight on consumer utility but without ignoring profitability considerations leads to the highest cumulative profit in the long run. This hybrid strategy results in a profit increase of about 20 % compared to pure consumer or profit oriented strategies. We also find that social media can reinforce the observed phenomena. In case when consumers heavily rely on social media, the cumulative profit of the best strategy further increases. To ensure reproducibility and foster future research, we publicly share our flexible simulation framework.