The Demand Effects of Product

Recommendation Networks: An Empirical Analysis of

Network Diversity and Stability

Zhijie LIN, Khim Yong GOH, Cheng Suang HENG

2 / 30

Introduction

• Example

3 / 30

Introduction

• Product Network

I

F

I I

I

F

Incoming Network Product

Focal Product

Incoming Tie

OO O

O Outgoing Network Product

Outgoing Tie

4 / 30

Introduction

• Research Gap 1: Network Bidirectionality

5 / 30

Introduction

• Research Gap 2: Network-Based Product Marketing

– which is to be recommended (network diversity)

– how often to replace recommendations (network stability)

6 / 30

Introduction

• Research Gap 3: Co-View vs. Co-Purchase

7 / 30

Introduction

• Research Questions

– Is the demand of a product influenced by both the incoming

network and outgoing network?

– How is the demand of a product influenced by product

network attributes in terms of network diversity and

network stability?

– How do the network diversity and stability effects differ

between co-view and co-purchase recommendations?

8 / 30

Literature

• Recommendation Systems

– algorithm design

• content-based approach (Adomavicius & Tuzhilin 2005)

• collaborative filtering approach (Ricci et al. 2011)

– economic impact

• decrease sales diversity (Mooney & Roy 2000)

• increase sales diversity (Brynjolfsson et al. 2006)

• increase individual consumer level diversity but decrease aggregate

market level diversity (Fleder & Hosanagar 2009)

• direct & indirect effect of recommendation (Pathak et al. 2010)

9 / 30

Literature

• Network Analysis– product network

• World Wide Web sites (Katona & Sarvary 2008)

• news reports (Dellarocas et al. 2010)

• blogs (Mayzlin & Yoganarasimhan 2012)

• videos (Goldenberg et al. 2012)

• demand shocks from exogenous book reviews (Carmi et al. 2010)

• product value = intrinsic value + extrinsic value (Carmi et al. 2011)

• network connection and demand (Oestreicher-Singer & Sundararajan 2012a)

• network connection and long tail (Oestreicher-Singer & Sundararajan 2012b)

– social network• diversity

– knowledge sharing (Cummings 2004), health condition (Barefoot et al. 2005), work performance (Wu 2011), online content propagation (Yoganarasimhan 2012)

• stability– mobile Internet usage (Ghose et al. 2011), product adoption (Tucker 2011)

10 / 30

Hypothesis

• Network Diversity– H1A: incoming network diversity � product demand (+)

• consumer heterogeneous product preference (Allenby et al. 1998)

– H1B: outgoing network diversity � product demand (-)• information diversity (Berlyne 1960) and attention distraction (Geissler et al. 2006)

• Network Stability– H2A: incoming network stability � product demand (+)

• visits-to-purchase (Moe & Fader 2004)

• consumer habit in online searches (Moe & Yang 2009)

– H2B: outgoing network stability � product demand (-)• substitutes: more desirable products (Schafer et al. 2001)

• complements: options for co-purchase (Schafer et al. 2001)

• Co-view vs. Co-purchase– H3: co-purchase > co-view

• co-purchase information is more persuasive

• more strategic use of co-purchase recommendations (e.g., Amazon)

11 / 30

Empirical Analysis

• Data Source

– Tmall.com

• Chinese-language business-to-consumer (B2C) platform

• the most visited B2C website in China (Alexa 2012)

• Nikon exclusive store (camera, lens, battery, flash, accessory)

– daily snapshots of product-related information at 12:00 a.m.

– daily snapshots of product network structure at 12:00 a.m.

– detailed product transaction records

• recommendation algorithm

– collaborative filtering approach

12 / 30

Empirical Analysis

13 / 30

Empirical Analysis

(buyer) (product name) (product price) (quantity) (transaction date & time)

(previous) (next)

14 / 30

Empirical Analysis

(product name)

(product price)

(product review)

(Co-view)

(Co-purchase)

(product name)

(product price)

(product review)

15 / 30

Empirical Analysis

• Focal Variables

– sales quantity

• QUANit

• total sales quantity of product i on day t

– network diversity

• co-view: ID_CVit / OD_CVit• co-purchase: ID_CPit / OD_CPit• number of unique product categories in product i’s incoming / outgoing

network on day t

– network stability

• co-view: IS_CVit / OS_CVit• co-purchase: IS_CPit / OS_CPit• percentage of overlap of network connections in product i’s incoming /

outgoing network of day t and day t+1

16 / 30

Empirical Analysis

• Control Variables

– product level

• price, review volume, review rating, monthly sales quantity, inventory, bookmark frequency

– product category level

• category fixed effect

– product network level

• in-degree and out-degree centrality

• Incoming and outgoing network product price

• Incoming and outgoing network product review volume

• Incoming and outgoing network product review rating

• Incoming and outgoing network product demand

– time unit level

• time fixed effect (daily)

17 / 30

Empirical Analysis

• Implicit Demand Correlation

SubstituteComplement

18 / 30

Empirical Analysis

• Implicit Demand Correlation

– cross-category price elasticities (Manchanda et al. 1999)

– category

• accessory, battery, flash, lens, compact camera, single lens reflex

(SLR) camera

– model

( )6 6 6

1 1 1

6 6 6

1 1 1

ln mn mn m

n n

n

mn mn mn

n

mt

n n n

n n n

n n n

nt nt nt

nt nt n mt mt

QUAN LP PV PR

PS IN BM

α β χ

δ ε φ ω ξ

= = =

= = =

= = =

= = =

= + +

+ + + + +

∑ ∑ ∑

∑ ∑ ∑

19 / 30

Empirical Analysis

• Implicit Demand Correlation

– price elasticity matrix

Category m

Category n

(1)

Accessory

(2)

Battery

(3)

Compact

Camera

(4)

Flash

(5)

Lens

(6)

SLR

Camera

(1) Accessory -0.127***

(0.047)

-0.089**

(0.041)

-0.055***

(0.008)

0.043***

(0.008)

0.071***

(0.016)

0.006

(0.025)

(2) Battery 0.245***

(0.076)

-0.163*

(0.094)

0.032*

(0.018)

0.005

(0.012)

0.151***

(0.012)

0.121*

(0.073)

(3) Compact Camera -0.209

(0.318)

-0.183***

(0.070)

-0.469***

(0.135)

0.050**

(0.023)

-0.043

(0.030)

-0.034

(0.024)

(4) Flash -0.796*

(0.458)

-0.323**

(0.153)

-0.338***

(0.092)

-0.703***

(0.077)

-0.015

(0.148)

-0.144

(0.125)

(5) Lens 0.183***

(0.024)

-0.012

(0.051)

0.043**

(0.021)

-0.007

(0.007)

-0.832***

(0.060)

0.013

(0.079)

(6) SLR Camera 0.293

(0.325)

0.240

(0.173)

-0.080

(0.145)

-0.022

(0.021)

0.094

(0.155)

-0.881***

(0.267)

Note: *p<0.1, **p<0.05, ***p<0.01

Note: Entry (m, n) represents the elasticity of category m‘s demand with respect to the price of category n.

20 / 30

Empirical Analysis

• Implicit Demand Correlation– Eij: the elasticity of product i’s demand with respect to the price of

product j

– i in category m, j in category n, m ≠ n� Eij = entry(m, n)

– i in category m, j in category n, m = n� Eij = |entry(m, n)|

• assumption: products within a category are substitutes (Walters 1991)

– for focal product i

• product j is a substitute if Eij > 0

• product j is a complement if Eij < 0

– substitution & complementarity

1

* , 0=

=

>=∑s S

ii s st i

s

t sE QUAN for all s with ESE

1

* , 0=

=

<=∑c C

ii c ct i

c

t cE QUAN for all c with ECE

21 / 30

Empirical Analysis

• Model Specification

( ) 1 2 3 4

5 76 8

9 10

15 16 1

11 12

7 1

13 1

1 0

8

4

9 2_

l

_

n _ _ _ _

_ _ _ _

_ _ _ _

it it it it it

it it it it

it it it it it it

it it it it

it

QUAN ID CV ID CP OD CV OD CP

IS CV IS CP OS CV OS CP

LP PV PR PS IN BM

IC CV IC CP OC CV OC CP

ILP CV ILP C

β β β β

β β β β

β β β β β β

β β β β

β β

= + + +

+ + + +

+ + + + + +

+ + + +

+ + 21 22

23 24 25 26

27 28 29 30

31 32 33 34

35 36

_ _

_ _ _ _

_ _ _ _

_ _ _ _

i t

it it it

it it it it

it it it it

it it it it

it it i it

P OLP CV OLP CP

IPV CV IPV CP OPV CV OPV CP

IPR CV IPR CP OPR CV OPR CP

IQ CV IQ CP OQ CV OQ CP

SE CE C T

β β

β β β β

β β β β

β β β β

β β γ µ α ε

+ +

+ + + +

+ + + +

+ + + +

+ + + + + +

22 / 30

Empirical Analysis

• ResultNote: *p<0.1, **p<0.05, ***p<0.01

VariableRE

Control

Price -0.000

Review Volume 0.002***

Review Rating 0.004***

Monthly Sales 0.012***

Inventory 0.000***

Number of Bookmarks -0.000***

In-degree Centrality (Co-view) -0.000

In-degree Centrality (Co-purchase) -0.002***

Out-degree Centrality (Co-view) -0.011***

Out-degree Centrality (Co-purchase) 0.001

Incoming, Price (Co-view) -0.000

Incoming, Price (Co-purchase) 0.000

Outgoing, Price (Co-view) 0.000

Outgoing, Price (Co-purchase) 0.000

VariableRE

Control

Incoming, Review Volume (Co-view) 0.000

Incoming, Review Volume (Co-purchase) -0.000

Outgoing, Review Volume (Co-view) 0.000

Outgoing, Review Volume (Co-purchase) -0.000

Incoming, Review Rating (Co-view) -0.002**

Incoming, Review Rating (Co-purchase) 0.000

Outgoing, Review Rating (Co-view) 0.002*

Outgoing, Review Rating (Co-purchase) -0.001

Incoming, Sales Quantity (Co-view) 0.002

Incoming, Sales Quantity (Co-purchase) 0.005***

Outgoing, Sales Quantity (Co-view) 0.004**

Outgoing, Sales Quantity (Co-purchase) 0.004***

Substitution Effect -0.005***

Complementarity Effect 0.009***

23 / 30

Empirical Analysis

• ResultVariable (1)

RE

Incoming

(2)

RE

Outgoing

(3)

RE

Co-view

(4)

RE

Co-purchase

(5)

RE

Full

(6)

FE

Full

Incoming, Diversity (Co-view) -0.004 -0.005* 0.001 0.005

Incoming, Diversity (Co-purchase) 0.009*** 0.010*** 0.012*** 0.002

Outgoing, Diversity (Co-view) -0.003 -0.001 -0.007 -0.002

Outgoing, Diversity (Co-purchase) -0.005*** -0.007*** -0.007*** -0.002

Incoming, Stability (Co-view) 0.007** 0.006* 0.006 0.003

Incoming, Stability (Co-purchase) -0.002 0.000 -0.002 -0.004

Outgoing, Stability (Co-view) 0.007* 0.000 0.005 0.007*

Outgoing, Stability (Co-purchase) -0.017*** -0.015*** -0.017*** -0.012***

Substitution Effect -0.005*** -0.005*** -0.005*** -0.005*** -0.005*** -0.004***

Complementarity Effect 0.008*** 0.009*** 0.009*** 0.008*** 0.009*** 0.007***

Observations 41,379 41,379 41,379 41,379 41,379 41,379

Hausman Test χ2 = 0.00, p = 1.00

R2 0.4919 0.4916 0.4913 0.4922 0.4936 0.1017

Note: *p<0.1, **p<0.05, ***p<0.01

24 / 30

Empirical Analysis

• Simultaneity

Variable (1)

Preferred

(2)

Lag 1

(3)

Lag 7

(4)

Lead 1

(5)

Lead 7

(6) Reduce

Bi-

directionality

(=100%)

(7) Reduce

Bi-

directionality

(>50%)

(8) Reduce

Bi-

directionality

(>10%)

Incoming, Diversity (Co-view) 0.001 -0.002 -0.010*** 0.007** 0.008*** 0.002 0.005 0.009

Incoming, Diversity (Co-purchase) 0.012*** 0.008*** 0.010*** 0.012*** 0.015*** 0.012*** 0.015*** 0.021**

Outgoing, Diversity (Co-view) -0.007 -0.001 -0.005 -0.005 -0.011*** -0.006 -0.007 0.008

Outgoing, Diversity (Co-purchase) -0.007*** -0.003** -0.004*** -0.004*** -0.004*** -0.009*** -0.013*** -0.033***

Incoming, Stability (Co-view) 0.006 -0.004 0.001 0.001 0.001 0.006 0.010* 0.008

Incoming, Stability (Co-purchase) -0.002 0.000 0.005 0.002 0.005 -0.002 -0.002 -0.006

Outgoing, Stability (Co-view) 0.005 0.009** 0.004 0.002 0.005 0.006 0.011* 0.019

Outgoing, Stability (Co-purchase) -0.017*** -0.011*** -0.009*** -0.012*** -0.012*** -0.018*** -0.027*** -0.060***

Observations 41,379 40,836 38,927 40,836 38,927 34,070 22,279 8,200

Sample Reduced 17.664% 46.159% 80.183%

R2 0.4936 0.4949 0.5021 0.4943 0.4939 0.5025 0.5339 0.6268

Note: *p<0.1, **p<0.05, ***p<0.01

25 / 30

Empirical Analysis

• Elasticity

• Standardized Coefficient

Network diversity ID_CV ID_CP OD_CV OD_CP

- 0.014*** - -0.011***

Network stability IS_CV IS_CP OS_CV OS_CP

- - - -0.012***

Note: *p<0.1, **p<0.05, ***p<0.01

Network diversity ID_CV ID_CP OD_CV OD_CP

- 0.055*** - -0.031***

Network stability IS_CV IS_CP OS_CV OS_CP

- - - -0.023***

Note: *p<0.1, **p<0.05, ***p<0.01

26 / 30

Empirical Analysis

• Hypothesis Testing Results

Hypothesis Support

H1A Network diversity (incoming) � Demand (+) Yes (co-purchase)

H1B Network diversity (outgoing) � Demand (-) Yes (co-purchase)

H2A Network stability (incoming) � Demand (+) No

H2B Network stability (outgoing) � Demand (-) Yes (co-purchase)

H3 Co-purchase > Co-view Yes

27 / 30

Empirical Analysis

• Robustness (1)

Variable (1)

Preferred

(2)

Significant

Elasticity

Only

(3)

Without

Elasticity

Weight

(4)

1st-stage

Uncertainty

Incoming, Diversity (Co-view) 0.001 0.001 0.006*** 0.001

Incoming, Diversity (Co-purchase) 0.012*** 0.012*** 0.010*** 0.012***

Outgoing, Diversity (Co-view) -0.007 -0.007* -0.004 -0.006

Outgoing, Diversity (Co-purchase) -0.007*** -0.007*** -0.005*** -0.007***

Incoming, Stability (Co-view) 0.006 0.006 0.004 0.006

Incoming, Stability (Co-purchase) -0.002 -0.002 -0.000 -0.001

Outgoing, Stability (Co-view) 0.005 0.005 0.006* 0.005

Outgoing, Stability (Co-purchase) -0.017*** -0.017*** -0.012*** -0.017***

Observations 41,379 41,379 41,379 41,379

R2 0.4936 0.4926 0.6623 0.4890

Note: *p<0.1, **p<0.05, ***p<0.01

28 / 30

Empirical Analysis

• Robustness (2)

Variable (1)

Preferred

(2)

Mean

Centering

(3)

Standardi

-zation

(4)

Hetero-

skedasticity

(5)

Serial

Correlation

(6)

Price

Endogeneity

(7)

Relative

Difference

Incoming, Diversity (Co-view) 0.001 0.001 0.001 0.001 0.003 0.002 0.001

Incoming, Diversity (Co-purchase) 0.012*** 0.012*** 0.015*** 0.012* 0.007*** 0.014*** 0.012***

Outgoing, Diversity (Co-view) -0.007 -0.007 -0.003 -0.007* -0.004 -0.010* -0.007

Outgoing, Diversity (Co-purchase) -0.007*** -0.007*** -0.008*** -0.007 -0.004** -0.008*** -0.007***

Incoming, Stability (Co-view) 0.006 0.006 0.002 0.006 0.005 0.008 0.006

Incoming, Stability (Co-purchase) -0.002 -0.002 -0.001 -0.002 -0.003 -0.002 -0.002

Outgoing, Stability (Co-view) 0.005 0.005 0.002 0.005* 0.006 0.005 0.005

Outgoing, Stability (Co-purchase) -0.017*** -0.017*** -0.006*** -0.017* -0.013*** -0.020*** -0.017***

Observations 41,379 41,379 41,379 41,379 41,379 29,172 41,379

R2 0.4936 0.4936 0.4936 0.4936 0.4754 0.5037 0.4936

Note: *p<0.1, **p<0.05, ***p<0.01

29 / 30

Empirical Analysis

• Robustness (3)

Variable (1)

Preferred

(2)

Price

Diversity

(3)

Market

Share

(4)

Actual

Day

(5)

Weekly

(6)

Dell

PC

Incoming, Diversity (Co-view) 0.001 0.000 -0.007 -0.001 0.047*** 0.001

Incoming, Diversity (Co-purchase) 0.012*** 0.000** 0.641*** 0.008*** 0.071*** 0.006**

Outgoing, Diversity (Co-view) -0.007 -0.000 0.034 -0.003 -0.063*** -0.003

Outgoing, Diversity (Co-purchase) -0.007*** -0.000** -0.274*** -0.005*** -0.032*** -0.016***

Incoming, Stability (Co-view) 0.006 0.004 0.055 0.003 0.039* 0.010

Incoming, Stability (Co-purchase) -0.002 -0.005 -0.004 -0.001 0.028 0.010

Outgoing, Stability (Co-view) 0.005 0.008** 0.361** 0.007* 0.050** 0.028*

Outgoing, Stability (Co-purchase) -0.017*** -0.015*** -0.451*** -0.019*** -0.102*** -0.027***

Observations 41,379 41,379 41,379 41,379 7,800 15,616

R2 0.4936 0.4929 0.4037 0.4938 0.6508 0.4597

Note: *p<0.1, **p<0.05, ***p<0.01

30 / 30

Contribution

• Theoretical

– product network / product recommendation

• unidirectional vs. bidirectional

• positive vs. negative impact of recommendation

• diversity effect and stability effects

• co-view vs. co-purchase

• Practical

– retailers: marketing strategies

• diversity: high incoming (co-purchase) + low outgoing (co-purchase)

• stability: low outgoing (co-purchase)

• more saliently display co-purchase recommendations

– platform providers: recommendation systems design

Q & A

Thank You

The Demand Effects of Product

Recommendation Networks: An Empirical Analysis of

Network Diversity and Stability

32 / 30

Overview

• Introduction

• Literature

• Hypothesis

• Empirical Analysis

• Contribution

• Conclusion

33 / 30

Empirical Analysis

• Finding

Co-view

Co-purchase

Incoming Outgoing

Diversity (+)Diversity (-)

Stability (-)

^

34 / 30

Conclusion

• Limitations

– unable to control for all potential sources of endogeneity

– lack of individual consumer clickstream data

• Future Research

– spillover effects of WOM (e.g., consumer review)

– automated recommendations vs. WOM recommendations

35 / 30

Appendix

• Descriptive Statistics

Variable Mean Std. Dev. Min Max

Sales Quantity 2.283 6.791 0.000 680.000

Incoming, Diversity (Co-view) 0.888 0.584 0.000 6.000

Incoming, Diversity (Co-purchase) 1.180 1.250 0.000 6.000

Outgoing, Diversity (Co-view) 1.090 0.446 0.000 4.000

Outgoing, Diversity (Co-purchase) 1.519 1.133 0.000 5.000

Incoming, Stability (Co-view) 0.787 0.307 0.000 1.000

Incoming, Stability (Co-purchase) 0.711 0.380 0.000 1.000

Outgoing, Stability (Co-view) 0.757 0.321 0.000 1.000

Outgoing, Stability (Co-purchase) 0.727 0.378 0.000 1.000

Note: Observations = 41,379; Products = 257; Days = 184.

36 / 30

Appendix

• Correlation Matrix

Variable 1 2 3 4 5 6 7 8 9

1 Sales Quantity -

2 Incoming, Diversity (Co-view) -0.027 -

3 Incoming, Diversity (Co-purchase) 0.000 0.478 -

4 Outgoing, Diversity (Co-view) -0.068 0.212 0.030 -

5 Outgoing, Diversity (Co-purchase) -0.024 0.201 0.472 0.294 -

6 Incoming, Stability (Co-view) 0.020 -0.184 -0.081 0.060 0.066 -

7 Incoming, Stability (Co-purchase) 0.011 -0.143 -0.247 0.035 -0.025 0.146 -

8 Outgoing, Stability (Co-view) 0.013 0.030 0.032 -0.242 -0.009 0.193 0.100 -

9 Outgoing, Stability (Co-purchase) -0.000 -0.014 -0.097 -0.226 -0.303 0.026 0.112 0.434 -

Note: Only major variables are reported. The correlations of these variables with other variables are generally small.

37 / 30

Appendix

• Granger Causality Test

No. of

lags

ID_CV ID_CP OD_CV OD_CP IS_CV IS_CP OS_CV OS_CP

χ2 p χ2 p χ2 p χ2 p χ2 p χ2 p χ2 p χ2 p

1 0.638 0.425 0.024 0.876 2.585 0.108 0.511 0.475 2.359 0.125 2.731 0.098 2.404 0.121 3.054 0.081

2 2.902 0.234 0.653 0.722 3.159 0.206 0.570 0.752 3.130 0.209 3.814 0.148 3.335 0.189 4.997 0.082

3 1.934 0.586 0.977 0.807 1.658 0.646 1.392 0.707 4.759 0.190 4.980 0.173 4.240 0.237 6.169 0.104

4 2.253 0.689 2.715 0.607 3.913 0.418 4.265 0.371 8.189 0.085 7.910 0.095 4.472 0.346 6.735 0.151

5 3.626 0.604 4.631 0.463 4.154 0.528 4.011 0.548 7.954 0.159 8.630 0.125 4.349 0.500 7.496 0.186

6 3.623 0.728 5.855 0.440 3.511 0.742 4.183 0.652 7.534 0.274 8.785 0.186 5.460 0.486 8.700 0.191

7 3.700 0.814 7.405 0.388 3.633 0.821 4.300 0.745 8.251 0.311 10.569 0.159 5.640 0.582 9.051 0.249