Do Recommender Systems Always Benefit Firms by Reducing Consumer Search Effort?

With the gain in popularity of the internet in the beginning of this decade, online shopping has witnessed a strong growth rate of about 25 percent per year. However, recent reports suggest that the growth rate is flattening. One of the key reasons for dwindling growth rate is the rise in expectations of the customers. Customers want that the retail websites should help them in finding products through recommendations. Therefore it is expected that firms would have higher profits by using recommender systems since that will boost their sales. However we show that increased profits are guaranteed only if a firm has the monopoly in the market. Market with two firms may not witness increased profits for both the firms. We analyze how the improvement in technology of recommender system affects the market, the price charged by the firms and therefore their profits.