Strategic adoption of the recommender system under online retailer competition and consumer search

Abstract

In the context of the digital economy, online retailers are faced with increasing competition and seek to improve sales and attract consumers through innovations such as recommender systems. This paper investigates the strategies for adopting recommender systems by online retailers, introducing a theoretical model to assess whether both incumbent and new entrant retailers should adopt these systems. The model conducts a comparative analysis, factoring in consumers’ search costs and the strategic choices of competitors. It establishes equilibrium outcomes for four distinct scenarios, followed by an analysis of the interplay between the strategy selection decisions of the two types of retailers. The results show that if one retailer does not adopt the system, the other retailer should always adopt it. However, when one retailer has already implemented the system, the other retailer should only do so if the search cost is relatively low and the recommendation cost is high, but not when the search cost is moderate. Given two retailers’ strategies, we identify the requirements that form two equilibriums: both retailers adopting the system, or only the incumbent retailer adopting it. Furthermore, the recommendation levels and product prices are not necessarily in a monotonic relationship with the cost of the system.