Abstract
Product recommendations are ubiquitous in platform-based markets. This paper investigates the externality of platform-provided recommendations by focusing on the demand spillover to related products. In the context of the fast-growing mobile app market, we systematically examine the spillover effect on three groups of related apps: apps by the same developer, apps with similar functionality, and the same apps marketed on a different platform. We distinguish two mechanisms that potentially drive the externality: exposure spillover and quality endorsement spillover. We find that both spillover mechanisms can drive the externality, but their strength and relative importance vary depending on the specific relationship between the featured and nonfeatured products. Furthermore, our heterogeneity analysis suggests that the strength of the spillover effect also depends on the salient characteristics of the featured products including price and user rating.
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