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- Welfare properties of profit maximizing recommender systems: theory and results from a randomized experimentPublication . Zhang, Xiaochen; Ferreira, Pedro Assis; Matos, Miguel Godinho de; Belo, RodrigoRecommender systems have been introduced to help consumers navigate large sets of alternatives. They usually lead to more sales, which may increase consumer surplus and firm profit. In this paper, we ask whether the firms’ choice of recommender system might hurt consumers. We use data from a large-scale field experiment in video-on-demand to measure the price elasticity of demand for movies placed in salient and non-salient slots on the TV screen. During this experiment, the firm randomized the prices and slots in which movies were recommended to consumers. This setting readily allows for identifying the effects of price and slot on demand, and thus computes consumer surplus. We find that consumers are less price-elastic toward movies placed in salient slots. Using the outcomes of this experiment, we simulate how consumer surplus and welfare change when the firm implements several types of recommender systems, namely one that maximizes profit. We show that this system hurts consumer surplus and welfare relative to a system that maximizes welfare. We also show that, in our setting, the system that maximizes profit does not generate less consumer surplus than several recommender systems frequently used in practice. Yet, the amount of extra rent the firm can extract from strategically placing movies in salient slots is still a function of the popularity and quality of movies used to do so. Ultimately, our results question whether recommender systems embed mechanisms that extract excessive surplus from consumers, which may call for better scrutiny.
- The effect of shortening lock-in periods in telecommunication servicesPublication . Yang, Baojiang; Matos, Miguel Godinho de; Ferreira, PedroIn this research note, we study the welfare implications of shortening the length of the lock-in period associated with triple play contracts using household level data, from a large telecommunications provider, for a period of 6 months. Using a multinomial logit model to explain consumer behavior we show that, in our setting, shortening the length of the lock-in period decreases the aggregated profit of the firms in the market more than it increases consumer surplus. This result arises because shortening the length of the lock-in period increases churn, and the costs to set up service for the consumers that churn and join a new carrier supersede the increase in the consumers' willingness to pay for service when the length of the lock-in period shortens.
- The effect of binge-watching on the subscription of video on demand: results from randomized experimentsPublication . Matos, Miguel Godinho de; Ferreira, PedroWe analyze the outcomes of two randomized field experiments to study the effect of binge-watching on subscription to video on demand. In both cases, we offered access to subscription VoD (SVoD) to a random set of households for several weeks and used another random set of households as a control group. In both cases, we find that the households that binge-watch TV shows are less likely to pay for SVoD after these free trials. Our results suggest that binge-watchers deplete the content of interest to them very quickly, which reduces their short-term willingness to pay for SVoD. We also show that recommendation reminders aimed at widening the content preferences of households offset the negative effect of binge-watching and lessen the concerns of binge-watchers with lack of content refresh. We discuss that these recommendation reminders may help content providers manage supply costs, which may otherwise become prohibitive with frequent updates to SVoD catalogs.
- How do people respond to small probability events with large, negative consequences?Publication . Eichenbaum, Martin; Matos, Miguel Godinho de; Lima, Francisco; Trabandt, Mathias; Rebelo, SergioWe study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.