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Supply-Side Equilibria in Recommender Systems

Algorithmic recommender systems such as Spotify and Netflix affect not only consumer behavior but also producer incentives. Producers seek to create content that will be shown by the recommendation algorithm, which can impact both the diversity and quality of their content. In this work, we investigate the resulting supply-side equilibria in personalized content recommender systems. We model users and content as $D$-dimensional vectors, the recommendation algorithm as showing each user the content with highest dot product, and producers as maximizing the number of users who are recommended their content minus the cost of production. Two key features of our model are that the producer decision space is multi-dimensional and the user base is heterogeneous, which contrasts with classical low-dimensional models. Multi-dimensionality and heterogeneity create the potential for specialization, where different producers create different types of content at equilibrium. Using a duality argument, we derive necessary and sufficient conditions for whether specialization occurs: these conditions depend on the extent to which users are heterogeneous and to which producers can perform well on all dimensions at once without incurring a high cost. Then, we characterize the distribution of content at equilibrium in concrete settings with two populations of users. Lastly, we show that specialization can enable producers to achieve positive profit at equilibrium, which means that specialization can reduce the competitiveness of the marketplace. At a conceptual level, our analysis of supply-side competition takes a step towards elucidating how personalized recommendations shape the marketplace of digital goods, and towards understanding what new phenomena arise in multi-dimensional competitive settings.

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