Welfare Effects of Personalized Rankings

Welfare Effects of Personalized Rankings*
Robert Donnelly Ayush Kanodia Ilya Morozov

Instacart Stanford University Northwestern University
January 21, 2022
Abstract
Many online retailers offer personalized recommendations that help consumers make their
choices. While standard recommendation algorithms are designed to guide consumers to the
most relevant items, retailers may have strong incentives to deviate from these standard algo-
rithms and instead steer consumer search to the most profitable options. In this paper, we ask
whether such profit-driven distortions arise in practice and study to what extent recommender
systems benefit consumers. Using data from a large-scale randomized experiment in which an
online retailer introduced personalized rankings, we show that personalized rankings lead to
more active consumer search and induce users to buy a greater variety of items relative to uni-
form bestseller-based rankings. To study whether these changes benefit users, we estimate a
search model and use it to measure consumer surplus under alternative ranking algorithms. Our
model captures flexible taste heterogeneity by combining a consumer search model from market-
ing with a latent factorization approach from computer science. Using this model, we estimate
heterogeneous tastes from individual data on both search histories and personalized rankings,
while explicitly recognizing that rankings have a direct causal effect on search behavior. We
show that, although the current personalization algorithm does put a positive weight on maxi-
mizing profitability, personalized rankings still benefit both the users and the retailer. Using this
case study, we argue that online retailers generally have incentives to adopt consumer-centric
personalization algorithms, which helps them balance between extracting short-term profits and
maximizing long-term growth.
*
This paper was previously circulated with the title “The Long Tail Effect of Personalized Rankings.” We thank
a group of researchers whose insightful comments and suggestions have greatly improved the paper: Eric Anderson,
Bart Bronnenberg, Jean-Pierre Dubé, Brett Gordon, Rafael Greminger, George Gui, Wes Hartmann, Ella Honka,
Yufeng Huang, Malika Korganbekova, Sanjog Misra, Harikesh Nair, Sridhar Narayanan, Navdeep Sahni, Stephan
Seiler, Anna Tuchman, and Caio Waisman, as well as seminar participants at Stanford University, Kellogg School of
Management, Chicago Booth, Virtual Quant Marketing Seminar, European Quant Marketing Seminar, and Consumer
Search Digital Seminar. We also thank James Ryan for his excellent research assistance. We are greatly indebted to
Vinny DeGenova, Malika Korganbekova, Evan Magnusson, Sunanda Parthasarathy, and Cole Zuber for helping us
access Wayfair data. All errors are our own.
Electronic copy available at: https://ssrn.com/abstract=3649342

1 Introduction
Many online companies use personalized recommendations to guide their users to the most relevant
options. Recommender systems have become ubiquitous and are now routinely used for recom-
mending products, news articles, movies, and music. A highly cited McKinsey report estimates
that recommendations drive at least 35 percent of what consumers buy on Amazon and 75 percent
of what they watch on Netflix.1 Similarly, YouTube officials report that the site’s recommenda-
tions drive over 70 percent of the total watch time.2 Deploying recommender systems has also
become simple, and numerous services such as Amazon Personalize promise to help any website
owner implement effective recommender systems with “no ML expertise required”.3 This decreas-
ing adoption cost, as well as the general effectiveness of recommender systems, may explain why
by the end of 2021 almost 1.8 million U.S. companies were offering personalized recommendations
on their websites.4
On the surface, all this sounds like great news for consumers. If personalized recommendations
help consumers discover better-matching options, they will generally increase consumer surplus
and lead to more transactions, thus improving the overall market efficiency (Koren et al., 2009;
Bobadilla et al., 2013; Gopalan et al., 2013). However, there has been a gap between the existing
research on recommender systems and their use in real markets. Since recommendations strongly
affect what consumers choose, companies may use them as an efficient marketing tool, much in
the same way they would use personalized pricing or advertising. Consistent with this, anecdotal
evidence suggests that Amazon, Taobao, Netflix, and Pandora have used personalized recommen-
dations to reduce per-unit costs and promote profitable options.5 In line with these anecdotes,
the theoretical work on this topic suggests that companies have strong incentives to deviate from
standard recommendation algorithms in order to optimize profit-related metrics (Hosanagar et al.,
2008; Bourreau and Gaudin, 2018). To the best of our knowledge, little empirical work has been
done on studying whether such profit-driven distortions arise in practice. In this paper, we measure
such distortions in online retail and explore their effects on consumer welfare.
We analyze a large-scale experiment in which Wayfair.com, a major U.S. online retailer of
furniture, started showing personalized item rankings to its users. Personalized rankings constitute
a common way to implement recommender systems because the order in which items are shown
strongly affects users’ choices (Ferreira et al., 2016; Ursu, 2018). In the experiment, randomly
1
See the report “How retailers can keep up with consumers” (MacKenzie et al., 2013).
2
The 70% statistic was quoted by Chief Product Officer Neal Mohan at a CES panel discussion in 2018. See the
article “YouTube’s AI is the puppet master over most of what you watch” (Solsman, 2018).
3
Source: Amazon Personalize (https://aws.amazon.com/personalize/).
4
We obtained this fact from builtwith.com, a platform that tracks internet technologies used by over 673 million
websites (e.g., targeted advertising, personalized recommendations, marketing analytics tools).
5
Pandora famously conducted “steering experiments” in which recommendations were tilted toward the music
tracks owned by the company (McBride, 2014). Similarly, Netflix’s recommendations tend to favor in-house pro-
ductions for which the streaming platform does not have to pay additional fees (Carr, 2013). Amazon researchers
have revealed that their email recommendation algorithm is more likely to favor more profitable recommendations
(Mangalindan, 2012). Finally, Taobao prioritizes recommending products with moderate prices to balance conversion
rates and commissions (Zhou and Zou, 2021).

selected users saw personalized item rankings tailored to their browsing histories, while others saw
non-personalized rankings that sorted items by historical popularity. Using these experimental data
allows us to establish whether personalized rankings had a causal effect on users’ choices rather
than showing items that consumers would have bought anyway. We use click-stream data from
almost two million users and show that personalized rankings induced more active consumer search
and substantially increased the purchase probability. We also show that personalized rankings
enhanced the aggregate diversity of purchased items, shifting demand from bestsellers to niche
items and generating a long tail effect in consumption.6
Although personalized rankings induce users to buy a wider range of items, this need not
automatically increase consumer surplus. To measure how personalized rankings affect consumer
welfare, we need to estimate users’ tastes and analyze to what extent rankings nudge each person
toward their highest-utility items. To estimate tastes, however, we need to address three main
challenges. First, we need to distinguish which items are searched because users like them, and
which are searched simply because they appear at the top of the page. Without distinguishing these
explanations, we cannot separate true tastes from position effects. Second, since repeat purchases
of furniture are rare, we cannot estimate taste heterogeneity from traditional panel data on repeat
purchases in our application. While we could use search data to learn taste heterogeneity as in Kim
et al. (2010), this would only partly address the issue: such data are typically sparse because most
users search few items. Third, it is difficult to capture users’ tastes with only a handful of observed
item attributes, especially in our setting where assortments are large and many choice-relevant
attributes are high-dimensional (e.g., photos) or difficult to measure (e.g., design originality).
We develop an empirical framework that addresses all three challenges. Our framework is based
on a simultaneous search model similar to those in De Los Santos et al. (2012) and Honka (2014).
The user first decides which items to search based on the observed item rankings, and then chooses
which item to buy given the outcome of the search process. We formulate this model and estimate
its parameters using both personalized and non-personalized data. To estimate the causal effect
of rankings on choices, we exploit the exogenous variation that the non-personalized algorithm
is adding to rankings before showing them to users. This variation, which is orthogonal to users’
individual tastes, allows us to estimate how moving an item to a higher position increases this item’s
search and purchase rates. Having estimated position effects from the non-personalized sample, we
take these estimates as given and use personalized data to recover taste heterogeneity as well as
the unknown parameters of the personalization algorithm.
One novel feature of our analysis is that we extract information about individual tastes directly
from personalized rankings. Because the retailer has already inferred users’ tastes from browsing
histories using data richer than ours, personalized rankings contain valuable information about
individual tastes. To extract this information, we explicitly model how the retailer selects per-
6
This result is broadly aligned with the experimental evidence from Holtz et al. (2020) who find that personalized
podcast recommendations on Spotify substantially increase the diversity of selected podcasts. By contrast, Lee
and Hosanagar (2019) find that personalized recommendations in online retail reduce the aggregate diversity of
consumption and shrink the total market share of niche items.

sonalized rankings for each user. We assume that when choosing rankings, the retailer may put
non-zero weights on two objectives: (a) maximizing the short-term profitability and (b) maximizing
the utility of users. While estimating these weights is interesting on its own, the resulting estimates
also indicate to what extent the observed rankings are informative about individual tastes. Our
estimation approach then estimates taste heterogeneity by combining information from three dis-
tinct (noisy) signals: rankings, searches, and purchases. In this sense, our approach generalizes the
standard empirical strategy of estimating individual heterogeneity from search and purchase data
(Kim et al., 2010).
Another novel feature of our analysis is the way we model consumer utility. Using the idea of
latent factorization from computer science (Koren et al., 2009), we introduce latent attributes that
are observed by users but not the researcher, and we allow users to have heterogeneous tastes for
these attributes. Such a utility structure enables us to flexibly recover taste heterogeneity even with
limited data on item attributes. Several authors before us used the latent factorization approach to
predict purchases (Jacobs et al., 2016; Wan et al., 2017), estimate flexible demand models (Athey
et al., 2018; Donnelly et al., 2019), and detect substitutes and complements among grocery items
(Ruiz et al., 2020).7 We contribute to this literature by applying latent factorization to a structural
search model and showing how latent attribute structures can be estimated from observed searches
and rankings. By adopting this approach, we also contribute to the recent effort to use machine
learning tools for flexible estimation of consumer heterogeneity in economic models (Farrell et al.,
2020).
Having estimated the model, we study how personalized rankings affect consumer surplus. To
this end, we simulate users’ search and purchase behavior under alternative ranking algorithms,
varying the extent to which rankings are aligned with individual tastes. We first compare consumer
surplus with and without personalization, which corresponds to the two ranking algorithms used
in the experiment. We show that personalized rankings benefit both the retailer and the users.
While personalization increases the average consumer surplus by almost 23% compared to non-
personalized rankings, the retailer’s expected revenues grow by 5.5%. We therefore do not find any
evidence that the existing personalization algorithm is designed to increase short-term revenues at
the expense of reducing consumer welfare. We then further show that the increase in consumer
surplus is driven by two equally important effects: personalization makes users more likely to make
a purchase, and it makes them buy higher-utility items conditional on purchasing. These utility
gains more than offset the loss from higher accumulated search costs, which users incur because
they now search a greater number of items.
Next, we estimate the weights that the current personalization algorithm puts on utility and
profitability, and we explore hypothetical scenarios in which these weights are different. Our es-
timates imply that the retailer puts non-zero weight on profitability, thus occasionally showing
profitable but not necessarily high-utility items in the top positions. To put this result into per-
7
There is also a smaller body of papers estimating demand models in which tastes depend on multiple unobserved
attributes (Elrod and Keane, 1995; Goettler and Shachar, 2001; Keane, 2004; Athey and Imbens, 2007).

spective, we show that the retailer could have put a much higher weight on profitability, which
would substantially reduce consumer surplus. Such a change could undo users’ benefits from per-
sonalization; in fact, it could even reduce the average consumer surplus to levels well below those
under non-personalized rankings. At the same time, the retailer could have put a zero weight on
profitability, which would further increase consumer surplus by about 10% or $1.7 per user. The
current personalization algorithm therefore appears to balance between these two extremes. In
other words, despite the minor profit-driven distortion documented here, users still extract sub-
stantial surplus from having access to personalized rankings.
Our work is related to three main strands of literature. The first one is the large and active
literature on recommender systems (Koren et al., 2009; Bobadilla et al., 2013; Gopalan et al.,
2013). Much of this literature has focused on designing and testing recommender systems that help
consumers discover relevant items, services, or information. Ever since the famous million-dollar
Netflix challenge in 2009, the task of designing recommender systems has been formulated as a
matrix completion problem, in which missing elements of the user-item taste matrix have to be
predicted from limited historical data (Jannach et al., 2016). Driven by this formulation, researchers
mostly focused on designing and studying recommender systems that maximize consumer-centric
objectives (e.g., ratings or clicks). In this paper, we emphasize that in practice companies may have
strong incentives to modify these standard algorithms in order to maximize profitability. Consistent
with this argument, in recent years there has been increasing interest in developing profit-aware
recommender systems that balance between user-centric and profit-centric objectives. (Panniello
et al., 2016; Jannach and Adomavicius, 2017; lEcuyer et al., 2017; Abdollahpouri et al., 2020).
Practitioners call for additional research that would make next-generation recommendation sys-
tems account for product profitability (Underwood, 2019), which raises further concerns about the
impact on consumer welfare. In our case study, we indeed find evidence of profit-driven distortions;
however, their magnitude is too small to reduce consumer welfare. This finding informs the ongoing
discussion on whether regulators should control the range of personalization algorithms that online
retailers are allowed to use (Koene et al., 2019).
Our paper also contributes to the recent literature on estimating the welfare effects of online
personalization. Whether personalization helps or harms consumers has been a subject of ongo-
ing data privacy debates. Dubé and Misra (2019) present an empirical case study of personalized
pricing at a large digital firm. Although third-degree price discrimination can theoretically reduce
consumer surplus, they show that most consumers in their case study benefited from personaliza-
tion. Goli et al. (2021) argue that firms can instead adopt “personalized versioning” strategies
that personalize service quality rather than price. Using results from a field experiment in which
Pandora varied advertising intensity across users, they find that personalization slightly reduced
the average consumer welfare. The personalized rankings we study can be viewed as an alternative
way for retailers to engage in “soft” price discrimination. For example, the retailer may identify
price-insensitive users and show them relatively expensive items, making them pay more and pre-
venting them from finding their optimal match. The possibility of such manipulations might call

for increasing monitoring efforts from regulators and consumer protection groups, especially given
that such practices are harder to detect than personalized prices.8 We contribute to this discussion
by considering a case study that allows us to explore whether personalized rankings in online retail
are aligned with consumers’ preferences.
Finally, our work is also related to the recent marketing literature on optimal rankings. Several
authors emphasized that, when optimizing rankings, companies face a trade-off between increasing
consumer utility and maximizing profits (Ursu, 2018; Choi and Mela, 2019; Compiani et al., 2021;
Zhou and Zou, 2021). For example, Choi and Mela (2019) study an online marketplace and em-
pirically show that ranking items by transaction revenue tends to reduce consumer utility, whereas
ranking items by utility may reduce profits. Compiani et al. (2021) document a similar tension
between maximizing utility and profitability. They also develop a near-optimal ranking algorithm
capable of improving both profits and consumer surplus. As a whole, this literature studies hy-
pothetical rankings that retailers could have potentially adopted. By contrast, here we analyze
an actual implementation of a personalized ranking algorithm, which allows us to bridge the gap
between the theory of optimal ranking algorithms and the way these algorithms are implemented
in practice.
2 Personalized Rankings on Wayfair.com

To study the effects of personalized rankings, we require a dataset that contains several key pieces.
First, we need to observe the exact rankings shown to each user. Without such data, it would be
difficult to estimate how rankings affect choices, describe the current personalization algorithm, or
study whether rankings steer users toward profitable options. Second, we also need to estimate the
causal effect of rankings on choices, a challenging task with only observational data. In general, the
retailer will be more likely to personalize rankings for active users with long browsing histories. We
might then mistakenly conclude that personalization makes users more active, whereas in reality
being active is the reason these users encounter personalization in the first place. To address this
endogeneity problem, we require a dataset where the degree of personalization varies across users
for reasons unrelated to their preferences. We now describe a dataset obtained from Wayfair which
helps us address these empirical challenges.
2.1 Field Experiment

We have obtained a dataset from Wayfair, a large U.S. online retailer of furniture and home goods.
The dataset describes the following randomized experiment. In 2019, Wayfair randomized all new
website users into two groups: personalized and non-personalized. With a probability 95%, new
website users were assigned to a personalized group in which the company used a proprietary algo-
rithm to personalize item rankings in each category. The remaining 5% of new users were assigned
8
In this vein, the recent report of European Parliament has called for additional research on “reverse engineering
the black-box algorithms” (Koene et al., 2019). The European Commission has also commissioned a pilot study that
monitors personalization algorithms via web scraping (Faddoul et al., 2020).

to a non-personalized group where items were sorted by historical popularity. The random assign-
ment was implemented at the user level, so a given user would observe either always personalized
or always non-personalized rankings in all product categories. We further describe both ranking
algorithms below.
Our dataset documents user behavior during two months, from September 9, 2019 to November
13, 2019, and contains 1,930,992 users who visited one specific category, the category of beds, at
least once during this period. All users in this sample made their first visit to the website at some
point in 2019. We focus on the category of beds because it is one of the highest-revenue categories
on Wayfair, and it features a large assortment of differentiated items that presents users with a
challenging search problem. For each user in our data, we observe their experimental assignment
(personalized or non-personalized group), the number of times they visited the category within the
two-month period, the item rankings they encountered upon each visit, the items they searched
and purchased, and their socio-demographic data (e.g., age, gender, income, and living area). One
limitation of our data is that we do not observe users’ browsing histories before joining Wayfair,
so we cannot directly verify whether users in the two experimental groups have similar histories.
Nevertheless, we managed to verify that users in these two groups are statistically similar in terms
of demographic variables and general shopping habits (see Appendix A).
A typical user starts their visit by opening the relevant category page which displays 48 items
(see the top panel of Figure 1). On this page, the user observes item prices, pictures, and some
basic attributes of items such as size, material, and style. Importantly, the order in which items are
displayed in this list varies across the two experimental groups. Although we do not know the exact
algorithm Wayfair used in each group, we do observe the rankings each user encountered during
their visit. After seeing the initial item list, the user can then search specific items by inspecting
their product pages. These product pages reveal additional information about items, including
textual descriptions, additional photos, and customer reviews (see the bottom panel of Figure 1).
The visit ends when the user either buys an item or leaves the category without buying.
In the personalized group, Wayfair uses a proprietary algorithm which can be viewed as a
modified collaborative filtering algorithm (Koren et al., 2009). The algorithm infers users’ tastes
from two kinds of data: browsing histories from the same product category of beds, and browsing
history from other related categories such as night tables, armchairs, and mattresses. For example,
if a user previously searched beds of modern style, the algorithm will use these data to infer style
preferences and show this user more beds of modern style in subsequent visits. It also makes cross-
category inferences: if the user has recently searched queen-size mattresses, the algorithm will
put more weight on displaying queen-size beds. Additionally, people who use search queries (e.g.,
“wooden beds”) encounter more personalization, as their rankings are further personalized based on
the search query itself. Lastly, users may encounter different amounts of personalization depending
on how much Wayfair knows about them. A completely new user who does not have an associated
browsing history would see popularity-based rankings identical to those in the non-personalized
group. In this sense, one can view our estimate below as an intention-to-treat (ITT) estimate:

Figure 1: Examples of a category page (top panel) and a product page (bottom panel) on
wayfair.com.

although Wayfair attempts to personalize rankings for everyone, it can only do so effectively for
users with sufficiently informative browsing histories.
In the non-personalized group, users see uniform rankings that sort items by historical popu-
larity. To construct these rankings, the algorithm computes the historical popularity based on the
number of clicks and purchases each item attracted in the past few months. The algorithm also
adjusts these raw popularity indices in order to promote sponsored or new items. We observe all
such promotion instances in the data. Importantly, before showing items to users, the algorithm
infuses rankings with exogenous variation by adding random noise to the computed popularity
indices. In our empirical strategy, we exploit this exogenous variation to estimate the causal effect
of rankings on users’ choices. Finally, having made all these adjustments, the non-personalized
algorithm displays items in the order of decreasing popularity indices.
Our sample includes 1,930,992 users who visited the category of beds at least once during the
observation period. Since many users visit the category of beds more than once, we select only the
earliest category visit for each user. Leaving one visit per user allows us to adopt a clean definition
of the item rankings that were displayed to each user. However, to compute the outcome variables
such as searches and purchases, we use data from both the first visit and all subsequent visits. That
is, we measure the effect of rankings that a user saw in the first visit on all subsequent searches and
purchases. A limitation of these data is that we do not observe any long-term outcomes, such as
which users came back to the website later in order to visit other product categories. We therefore
cannot study whether personalized rankings can help Wayfair to increase customer retention and
maximize long-term profits.
2.2 The Effects of Personalized Rankings

We first compare user behavior in the personalized and non-personalized groups. Since users are
randomly assigned to these two groups, this comparison yields the causal estimates of personal-
ization effects, which serve as a starting point for our analysis. Later in Sections 3 and 4, we will
estimate an empirical search model and study how these estimates translate into consumer welfare
changes. Column 2 in Table 1 describes user behavior in the non-personalized group. Out of all
category visitors, 31.7% of users search any item during the visit. Conditional on searching at
least one item, an average user searches only 2.4 items, indicating limited consumer search. We see
more active search during visits that end in purchases: users search on average 2.2 items before
purchasing but only 0.7 items before leaving the category without a purchase. Our model in Section
3 will rationalize this difference by assuming that some users have a stronger preference for buying
a bed on Wayfair (or a worse outside option), which induces them to search more and purchase
with a higher probability. However, only 2.3% of users make a purchase. While it is common to see
conversion rates of less than 5% in online retail, this scarcity of purchase data does suggest that
we need to rely on search and ranking data for the estimation of users’ preferences.
We compare this behavior to that under personalized rankings (see column 2 in Table 1). Under
personalized rankings, users are twice as likely to search at least one item (64.4% vs. 31.7%, p-value

Non-Person. Personalized Difference (P ers − N onP ers)
Rankings Rankings Change % T-statistic P-value
Searched Any Item 0.317 0.644 103.2 217.2 <0.0001
Searches (total) 0.77 1.92 149.4 143.3 <0.0001
Searches (if positive) 2.44 2.98 22.1 36.8 <0.0001
Searches (if purchase) 2.21 3.52 59.3 20.9 <0.0001
Searches (if no purchase) 0.74 1.88 154.1 142.3 <0.0001
Position Searched Items 21.7 20.4 -6.1 -2.5 0.0114
Position Purchased Item 14.9 16.9 12.9 0.7 0.4884
Opened Second Page 0.141 0.182 29.1 39.2 <0.0001
Purchase Rate 0.0233 0.0254 9.0 4.2 <0.0001
Revenue Per User 100%1 104.5% 4.5 1.7 0.0997
Price Searched Items 100%1 116.0% 16.0 16.0 <0.0001
Price Purchased Item 100%1 96.0% -4.0 -1.7 0.0878
N =1,930,992 users (N p = 1, 824, 654 personalized, N h = 106, 338 non-personalized)
Table 1: The effect of personalized rankings on users’ search and purchase behavior and on
the retailer’s revenues. Since users are randomly assigned to these two groups, the difference between
the values in columns 1 and 2 estimates the causal effect of personalized rankings. The last two columns
report t-statistics and p-values from the corresponding two-tailed tests of mean differences. 1 To preserve
data confidentiality, the last three rows report revenues and prices only relative to their values in the non-
personalized sample.
< 0.0001), search more than twice as many items on average (1.92 vs. 0.77, p-value < 0.0001), and
are 9% more likely to make a purchase (with purchase rates 2.54% vs. 2.33%, p-value < 0.0001).
These results suggest that personalized rankings are successful at displaying highly relevant items,
which encourages users to search more and makes them more likely to find a good match. Table 1
also shows that personalization increases the expected revenue per user by 4.5% (p-value 0.0997).
At the same time, we do not find any strong evidence that personalized rankings are nudging users
toward expensive items. If anything, users in the personalized group purchase items with slightly
lower prices, although the observed decrease of 4% is economically small. Therefore, the observed
change in revenues is mostly driven by higher transaction volume rather than higher prices paid by
the users.
We also find that personalization redistributes demand from bestsellers to previously unpopular
items. Figure 2 shows the purchase shares of different items with and without personalization.
The figure orders items by their purchase frequency among non-personalized users, with the most
popular items located on the left. Personalized rankings reduce the popularity of bestseller items
but increase the demand for relatively unpopular items. As personalization boosts the demand for
many items outside the top 80-100 bestsellers, the distribution of shares gains a thicker right tail.
In other words, personalized rankings generate a long tail effect in consumption by substantially
increasing the variety of purchased items.
When put together, these results support the idea that personalization allows users to discover
appealing niche items that would otherwise be difficult to discover (Anderson, 2006). By niche
10

Figure 2: Personalized rankings generate the long tail effect in purchases. The graph shows the
distribution of purchase shares across 700 most popular items in our data for two groups of users, personalized
(dashed line) and non-personalized (solid line). On the horizontal axis, we order items by their popularity
in the non-personalized group, with the most popular items at the left of the graph. We measure popularity
by the number of times each item was purchased in the non-personalized sample. The graph shows that
personalized rankings redistribute demand from popular bestsellers toward relatively unpopular, niche items.
items, we mean those for which different users have substantially different utilities; those items
are loved by some users and hated by others.9 Several pieces of evidence suggest that Wayfair’s
personalized rankings indeed guide users toward desirable niche items. First, we find that person-
alization increases the purchase rate but makes users buy a larger variety of items. This finding
suggests that each user is now discovering items that match their unique tastes better but that are
not necessarily appealing to others. Second, we also find that personalized rankings increase sales
of beds with unusual designs and uncommon combinations of attributes. Several bed styles become
substantially less popular under personalization, including Beachy, Modern Rustic, Traditional,
American Traditional, and Ornate Traditional. The examples in Figure 7 (top panel) of Appendix
B show that beds of these styles are largely standard beds in neutral colors that are made of wood
and use common upholstery materials. By contrast, styles that become substantially more popular
under personalization include Slick and Chic Modern, Glam, Modern Contemporary, and Bold and
Eclectic Modern. Figure 7 (bottom panel) shows that beds of these styles have unusual shapes,
provocative colors, and highly original designs. Overall, these contrasting examples suggest that
9
Johnson and Myatt (2006) formalize the idea of niche items using the concept of demand rotations: an item j is
more “niche” than k if the demand for item j represents a clockwise rotation of the item k’s demand curve. In other
words, an item is more “niche” when consumers are more divided in their preferences for this item. Bar-Isaac et al.
(2012) use this formal definition of niche items in their theoretical search model.
11

Displayed Item
Item A Item B Item C
Panel A: Utilities and Profits
User 1 (utility δij ) -2 -3 -4
User 2 (utility δij ) -2 -4 -3
Per-Unit Profit πj $1 $3 $3
Panel B: Purchase Probabilities
User 1 0.119 0.047 0.018
User 2 0.119 0.018 0.047
Panel C: Expected Profit*
User 1 $0.12 $0.14 $0.05
User 2 $0.12 $0.05 $0.14
Table 2: Stylized example. In this example, the retailer finds it optimal to steer users toward profitable
but low-utility niche items (i.e., items B and C) instead of a more uniformly appealing but less profitable item
A, which reduces consumer surplus. *The expected profit in Panel C is defined as the purchase probability
from Panel B multiplied by the per-unit profit πj from Panel A.
the personalized ranking algorithm successfully identifies users with relatively unusual tastes and
guides them toward appealing niche items.
2.3 Does Personalization Benefit Users? A Stylized Example

Even though personalized rankings increase the variety of purchased items, this change does not
necessarily benefit users. To see this, consider the following stylized example in which the retailer
finds it optimal to steer users toward profitable but unappealing niche items, thus reducing consumer
welfare. Suppose two users (1 and 2) are choosing among three items (A, B, and C). Assume user i
derives utility uij = δij + εij from buying item j where δij are mean tastes and εij are idiosyncratic
taste shocks. Panel A in Table 2 shows the assumed values of δij . Item A has broad customer appeal
and generates reasonably high utility for both users. By contrast, items B and C are niche, as each
of them only appeals only to one user. To illustrate the conflict of incentives, we assume that selling
niche items is more profitable so that the per-unit profit is $1 for item A and $3 for items B and C.
Consider a simple ranking problem in which the retailer shows exactly one item to each user, and
assume that a user buys the displayed item with the probability σ(δij ) = exp(δij )/(1 + exp(δij )).
The user also derives the consumer surplus of log(1 + exp(δij )), which corresponds to a simple logit
choice model.10 This surplus function abstracts from the costly search for exposition purposes,
although our search model in Section 3 will characterize welfare more completely by accounting
for search costs. In Panel B of Table 2, we compute the purchase probabilities of each user as a
function of the displayed item.
10
Suppose that each user compares the utility from the displayed item, uij = δij + εij , to that of the outside
option, ui0 = εi0 . Under the type-I extreme value distribution of idiosyncratic tastes εij , this user then purchases
the displayed item with the probability P r(uij > ui0 ) = P r(δij + εij ≥ εi0 ) = σ(δij ) = exp(δij )/(1 + exp(δij )) and
derives the expected consumer surplus of E(max(uij , ui0 )) = γ + log(1 + exp(δij )) where γ is the Euler-Mascheroni
constant. The constant γ is omitted from welfare comparisons to simplify notation.
12

We first consider a non-personalized scenario in which the retailer must show the same item to
both users. In this scenario, it is optimal for the retailer to show item A to both users. Doing so
generates the expected profit of $0.24 compared to $0.19 from showing item B or C (we compute
the expected profits in Panel C of Table 2). The retailer then displays item A to both users,
generating the expected utility of log(exp(−2) + exp(0)) = 0.055 for each of them. Next, consider
a personalized scenario in which the retailer can show different items to the two users. As Panel C
shows, the retailer can increase the expected profit by displaying the relevant niche items: item B
to user 1 and item C to user 2. Although the users are relatively unlikely to buy these niche items,
selling them generates much higher per-unit profits. In fact, such personalized rankings generate
the expected profit of $0.28 ($0.14+$0.14), higher than in the non-personalized scenario. Such
personalization, in turn, dramatically reduces consumer surplus from the non-personalized level of
0.055 to log(exp(−3) + exp(0)) = 0.021. In other words, this example shows that the retailer may
find it optimal to steer users toward profitable niche items at the expense of reducing consumer
surplus.
3 Estimating Welfare Effects of Personalized Rankings

3.1 Empirical Search Model
Indirect utility. Consider a product category where N users (indexed i = 1, . . . , N ) choose
among J different items (indexed j = 1, . . . , J). Each user i only observes a subset of items Ji ⊆ J
determined by the ranking algorithm. We assume that the indirect utility user i derives from item
j is given by:
uij = −αi pj,t(i) + x0j βi + ξj0 θi +εij (1)

| {z }
δij pre-search utility
where pj,t(i) is the price of item j on the day t(i) of user i’s visit, xj is a vector of KO observed item
attributes, ξj is a vector of KL latent attributes, and αi , βi , and θi are user i’s price sensitivity and
attribute preferences. This model mimics the information environment in which Wayfair users make
choices. We assume that for items in the set Ji , the user observes prices pj,t(i) and item attributes
xj and ξj without searching, which is the case in the category of beds where users observe prices
and basic attributes of beds on the category page. Our dataset includes information on bed size,
material, and style, the attributes we include in the vector xj . At the same time, users observe item
images from which they can infer other bed attributes (e.g., material quality, design originality, and
perceived comfort), which we capture by introducing latent attributes ξj . Since attributes ξj are
observed to the users but not the researcher, we will need to estimate them together with other
parameters.
The term εij is the match quality of item j for user i, which captures additional information
that the user acquires upon closer inspection of the product page (e.g., information about the
13

ease of assembly, stain resistance). The user can also choose the outside option for which the pre-
search utility is normalized to zero, so δi0 = 0 and ui0 = εi0 . Choosing the outside option can be
interpreted as continuing search in another store or deciding not to buy a bed at all. We assume
that εij and εi0 are distributed i.i.d. type I extreme value, and we normalize their variance to one
to fix the utility scale, so that σε2 = 1.
Consumer search. Users search according to the simultaneous search model, similar to that
in De Los Santos et al. (2012) and Honka (2014). They observe the pre-search utilities of items
δij = −αi pj,t(i) + x0j βi + ξj0 θi but have to search in order to learn the match values εij . We assume
that users must visit the product page of item j in order to learn the match value εij , and that
this value is completely revealed to them upon opening that page. The user chooses how many and
which items to search, thus committing to a specific search set S ⊆ Ji . For each item included in
the set S, the user has to pay a search cost cij which we parameterize below. Once the search set
S is selected, the user examines all items in this set, learns their exact utilities uij , and chooses the
highest-utility item.
Given the assumed distribution of match values εij , the expected net benefit to user i of searching
all items in the set S, denoted by miS , is the difference between the expected maximum utility of
items in this set and the total cost of searching these products:
X X X
miS = E max{uij } − cij = log exp(δij ) − cij (2)
j∈S
j∈S j∈S j∈S
where the outside option is always included in S and has zero pre-search utility and zero search cost
(δi0 = 0, ci0 = 0). It is optimal for user i to choose the search set S that maximizes the expected
net benefit miS . Following De Los Santos et al. (2012), we smooth the choice set probabilities by
adding a mean-zero stochastic noise term ηiS to the expected benefit miS of each potential search
set. The stochastic term ηiS might be interpreted as reflecting errors in an individual’s assessment
of the net expected gain of searching the set S. As we will demonstrate below, smoothing choice
probabilities significantly simplifies estimation.11 In practice, we do not lose much from adding an
idiosyncratic error term; at the same time, we gain a substantial robustness to measurement error
in observed searches.
Assuming ηiS is i.i.d. type I extreme value distributed with scale parameter ση , the probability
that the user i finds it optimal to search the set S conditional on observing the ranking R is then:
exp(miS /ση )
PiS|R = P (3)
S 0 ⊆Ji exp(miS 0 /ση )
where Ji is the set of items the user observes under the ranking R. Note that the summation
11
Alternatively, we could add a stochastic term directly to the pre-search utility δij (Ursu, 2018; Honka and Chinta-
gunta, 2015). However, the estimation procedure would then require computing search likelihoods by simulating the
search behavior of artificial users, which is computationally expensive. We would also need to artificially smooth the
resulting frequency estimators, which might generate bias of an unknown sign and magnitude (Chung et al., 2018).
14

in the denominator runs across all possible sets S 0 the user could have formed from the set of
displayed items Ji . Since the number of possible search sets is very large, in the actual estimation
we approximate this sum using simulation (see Section 3.3 for details).
Having resolved the uncertainty about match values εij , the user chooses the highest-utility
option within the selected set S. Given that match values are distributed i.i.d. type I extreme
value, the probability of user i choosing item j is given by the standard logit formula:
exp(δij )
Pij|S = P f or j∈S (4)
k∈S exp(δik )
The purchase probability is zero for items outside the set S, because we assume the user has to
search an item before buying it.
The outside option plays an important role, as it enables us to model users who either search
but do not buy anything, or decide not to search at all after seeing item rankings. We could, in
principle, remove data on users without purchases and write a simpler model in which users must
always make a purchase. However, since less than 10% of users make purchases, doing so would
imply discarding over 90% of the data on searches and rankings that are highly informative about
taste heterogeneity. An advantage of our model, therefore, is that it enables us to use more of the
available data in estimation. It also allows us to understand whether personalized rankings can
persuade some users to make a purchase by showing them highly relevant items.
Following Ursu (2018), we model position effects by assuming that the search cost cij depends on
the position in which item j is displayed to user i. We assume that the item in the first position has
a search cost c, which we interpret as a baseline search cost. The items in the subsequent positions
have search costs c + p2 , c + p3 , . . . , c + p48 where we interpret pr as the position effect for position
r (for r = 2, . . . , 48). In theory, we could estimate all position effects p2 , . . . , p48 nonparametrically,
thus recovering a flexible position effect curve. In practice, we simplify the problem by estimating
only position effects p2,... p10 for the first ten positions, and we separately estimate p11 which captures
the average position effect for all remaining positions 11 to 48. Estimating more flexible search
costs functions makes little difference for our qualitative results, mostly because the vast majority of
searches and purchases land on the first ten positions. Since items closer to the bottom of the page
are more difficult to locate and search, we expect them to have higher estimated position effects pr
(and therefore higher search costs cij ). Lastly, we assume that rankings affect choices only indirectly
via search costs but not directly by influencing utilities uij . This assumption follows the results in
Ursu (2018) who shows in a randomized experiment that rankings shift search probabilities but do
not directly affect purchase probabilities conditional on search.
Latent Factor Approach. Our empirical framework combines a simultaneous search model from
economics and marketing with the latent factorization idea from computer science (Koren et al.,
2009). In this model, users have heterogeneous preferences for both observed item attributes xj and
multiple latent attributes ξj . It helps to think about this combination in the context of the discrete
15

choice modeling literature. The idea of specifying a choice model with this level of flexibility can
be traced back at least to McFadden (1981), but few authors have followed this approach. Some
notable exceptions are papers that used the latent factor approach to predict purchases (Jacobs
et al., 2016; Wan et al., 2017), estimate flexible demand models (Athey et al., 2018; Donnelly et al.,
2019; Athey and Imbens, 2007), and detect substitutes and complements among grocery items
(Ruiz et al., 2020).12 Our innovation is to use the latent factorization approach within a structural
search model.13
Combining a search model with a flexible utility structure allows us to get the best of two
worlds. On the one hand, the added flexibility helps us capture rich substitution patterns. By
modeling heterogeneity as a function of multiple observed and latent attributes, we effectively
impose a convenient low-dimensional structure on the covariance matrix of utilities uij . This
feature makes our approach more flexible than that of Berry et al. (1995), which mostly relies on
observed attributes xj and includes only one latent attribute ξj entering utility functions of all
users with the same coefficient. As discussed in Section 3.4, this added flexibility proves critical for
recovering taste heterogeneity from data on rankings, searches, and purchases. On the other hand,
the structure of the search model enables us to construct a series of counterfactuals exploring how
users would have changed their behavior under alternative ranking algorithms. It also helps us
interpret estimated tastes and search costs as structural parameters, thus giving us a meaningful
and interpretable measure of consumer surplus.
3.2 Model of Rankings

Non-personalized rankings
We also model how the retailer selects rankings for each user, both in the personalized and non-
personalized groups. Our main goal here is to capture the main aspects of both ranking algorithms.
Although we do not know the exact algorithms the company uses, from our private conversations
with Wayfair we know which variables serve as key inputs to each of them. Our general strategy is
to specify a family of algorithms with that structure and estimate the unknown parameters directly
from the observed rankings.
We model non-personalized rankings as follows. To construct rankings for user i, the retailer
sorts items in the order of decreasing indices vij , showing only R̄ items with the highest index
values. This process generates the effective choice set Ji of user i. Since in our application more
than 90% of users only look at the first page, we simplify the analysis by assuming that the user
does not see other items outside of the set Ji . We then set R̄ = 48 which corresponds to the number
of items Wayfair shows on the first page of the category list. The index vij is given by:
12
There is also a smaller body of papers estimating demand models in which tastes depend on multiple unobserved
attributes (Elrod and Keane, 1995; Goettler and Shachar, 2001; Keane, 2004; Athey and Imbens, 2007).
13
In a parallel effort, Armona et al. (2021) also estimate a simultaneous search model with latent attributes. They
do not incorporate ranking effects into their estimation and rely on a different inequality-based estimation technique.
They also use the estimated model to predict competition and analyze mergers, thus focusing on a completely different
research question.
16

vij = w̃ · (−ᾱpj,t(i) + x0j β̄ + ξj0 θ̄) +e
γ 0 zj,t(i) + µhij if i ∈ N onP ersonalized (5)
| {z }
ūij mean utility
where ᾱ, β̄, θ̄ are users’ mean tastes, w̃ is the weight that the retailer puts on the mean utility,
t(i) is the day of user i’s category visit, zj,t(i) is the M × 1 vector of time varying item-specific
e is the M ×1 vector of regression coefficients, and µhij is a stochastic term distributed
characteristics, γ
i.i.d. type I extreme value with scale parameter σµh . The vector zj,t(i) in our application includes
indicators for new and sponsored items, which accounts for periods when Wayfair promotes such
items at the top of the page. The stochastic term µhij captures exogenous variation that the
algorithm is adding to the non-personalized rankings.
To estimate position effects, we use exogenous variation in rankings generated by the non-
personalized algorithm. This algorithm computes item popularity indices that capture how fre-
quently users searched and purchased a given item in the past few months. Assuming that user
tastes remain stable over time, we can capture the historical popularity of items in the model (5)
using the average tastes λ̄.14 The algorithm then adjust popularity indices vij for new and spon-
sored items (captured by the γ 0 zj,t(i) term), and it adds some random noise before showing rankings
to users. Therefore, the algorithm infuses non-personalized rankings with exogenous variation. Our
general strategy is to isolate such variation using the stochastic term µhij , which allows us to observe
how the same item moves across positions for reasons unrelated to unobserved demand shocks. This
variation enables us to estimate position effects by measuring to what extent shifting an item to a
higher position increases its search and purchase probabilities.
Given the extreme value distribution of stochastic terms µhij , the probability that the retailer
chooses the ranking R has a closed-form solution given by the so called “exploded logit” formula
(Punj and Staelin, 1978). Since the scale parameter σµh is not separately identified from coefficients
e, we divide all terms in the equation (5) by σµh so that the stochastic term µhij has a
w̃ and γ
variance of one and w = (w̃/σµh ) and γ = (e
γ /σµh ) are the normalized coefficients we will recover
during estimation. Without loss of generality, assume that the retailer shows item j = 1 in the
first position, item j = 2 in the second position, and so on until position R̄ that is filled with item
j = R̄. Then the probability that the retailer finds ranking R is optimal is given by:

R̄
Y exp wūir + γ 0 zr,t(i)
PiR = (6)
0z
P
r=1 J≥k≥r exp wūik + γ k,t(i)
where ūj is the mean utility of item j from the equation (5). The product in (6) is taken across all
R̄ positions displayed to the user. The first term of this product is the probability that item j = 1
14
Ideally, we would have data on the exact inputs that went into the non-personalized ranking algorithm on each
day (e.g., the exact historical popularity indices of items used by the algorithm). We were, unfortunately, unable to
obtain such data. As a robustness check, we experimented with estimating our model on October-November data
while approximating historical popularity using purchases made by users in September, and we arrived to similar
qualitative results.
17

has the highest index vij out of all J items, the second term is the probability that item j = 2 has
the highest index vij among the remaining J − 1 items, and so on. We note that taking a log of
the likelihood in (6) yields a sum of R terms, each of which is a standard logit probability.
Personalized rankings
We also model how the retailer selects personalized rankings. In doing so, we pursue two objectives.
First, to reverse engineer the existing personalization algorithm, we need to specify a class of possible
algorithms and estimate the unknown parameters from the data. Second, we use this model to
extract information about heterogeneous tastes from the personalized rankings shown to different
users. Our model recognizes that rankings partly reveal information the retailer has acquired
about each user’s tastes from their browsing histories. Therefore, ranking data potentially contains
rich information about taste heterogeneity. Our approach contributes to the prior literature by
incorporating these data into estimation, while at the same time recognizing that the retailer may
modify personalized rankings based on criteria other than utility maximization (e.g., profitability).
This aspect of the model distinguishes our approach from the prior work, which primarily recovered
taste heterogeneity using panel data or repeat purchases (Rossi et al., 1996, 2012) or individual
search data (Kim et al., 2010).
To model personalized rankings, as before we assume that the retailer sorts items in the order
of decreasing indices vij and shows only R̄ = 48 highest-index items to user i. The indices vij are
defined as:
vij = w̃u δij + w̃π πij + µpij if i ∈ P ersonalized (7)
where δij = −αi pj,t(i) + x0j βi + ξj0 θi is the pre-search utility defined in (1), πij is the variable
measuring the profitability of selling the item j to user i, w̃u and w̃π are weights the retailer puts
on the two objectives (maximizing utility and profitability), and µpij is a stochastic term distributed
i.i.d. type I extreme value with the scale parameter σµp . To measure profitability πij , we would
ideally use data on item-specific margins (i.e., average price net of marginal cost). Since we do not
have access to such data, we measure profitability using the current item’s price, pij .15
The term µpij captures the fact that the retailer does not perfectly observe the tastes δij and
personalizes rankings based on a noisy estimate. As discussed in Section 2.2, the amount of per-
sonalization each user gets will generally depend on how much Wayfair knows about them. Users
with richer browsing histories will have their item lists more personalized than those who rarely
visit the website. From this perspective, it would make sense to assume that the variance σµp is
lower for users with longer histories. A limitation of our data, however, is that we do not observe
users’ histories prior to our observation period. We therefore simplify the model by assuming the
same variance σµp for all users. In this sense, our model of rankings captures the average amount of
15
We also attempted to impute item-specific marginal costs mcj from the inverted demand system and used these
cost estimates as an alternative measure of profitability. This alternative approach generated qualitatively similar
results, although we did obtain a somewhat lower estimated utility weight wu .
18

uncertainty the retailer faces about users’ tastes. One can then interpret the results in Section 4 as
welfare effects of personalized rankings for a user with the average length of the browsing history.
Given the distribution of stochastic terms µpij , we can once again use the exploded logit formula
to compute the likelihood of observing specific rankings R. As before, the scale parameter σµp is
not separately identified from weights w̃u and w̃π , so we fix the variance of the stochastic term to
one and estimate the normalized weights wu = w̃u /σµp and wπ = w̃π /σµp . The probability that the
retailer finds it optimal to choose the ranking R is then equal to:

R̄
Y exp wu δir + wπ πir
PiR = P (8)
r=1 J≥k≥r exp w u δik + w π π ik
where, as with non-personalized rankings, the product runs across all R̄ positions displayed to the
user.
The ranking model in (7) approximates the actual personalized ranking algorithm of Wayfair.
This model simplifies the actual algorithm in several ways. First, due to data limitations, we con-
sider only two potential objectives of the retailer, maximizing short-term utility δij and short-term
profitability πij . While such a model does not capture other retailer’s incentives (e.g., maximizing
long-term profits, advertising revenues), it does allow us to study the trade-off between choosing
utility-centric and profit-centric rankings. Second, we do not consider the problem of choosing
“truly optimal” rankings in which the retailer chooses one ranking out of all possible item or-
derings. Such a model would be impossible to solve because the number of possible rankings is
astronomically large. To circumvent this issue, we instead consider a simplified model in which
the retailer sorts items by simple indices vij , which we parameterize and recover from the data.
This model can be viewed as an approximation to the full optimization problem. By considering
this simplified ranking rule, we obtain a more practical model that is straightforward enough to
estimate and yet sufficiently flexible to help us study the retailer’s incentives.
Despite its apparent simplicity, the ranking model in (7) is capable of capturing a wide range
of personalization strategies. First, note that by changing the weights, the retailer can either show
utility-based rankings (high wu ), or profitability-based rankings (high wπ ), or adopt an interior
solution that puts substantial weights on both objectives. Choosing a non-zero weight wπ is also
not equivalent to moving expensive items to the top of the page for all users. An expensive item will
only be shown at the top positions if it yields a sufficiently high utility δij . For example, the retailer
will only show an expensive item to users who have been revealed to have low price sensitivity or
who have sufficiently strong tastes for this item’s attributes.
3.3 Maximum Likelihood Estimation

Suppose we have data on N users and observe each user’s ranking Ri , selected search set Si , and
purchase decision yi ∈ Si . Our goal is to recover the heterogeneous tastes λi = (αi , βi , γi ), search
cost c, position effects (p2 , . . . , p11 ), scale parameter ση , and ranking parameters (γ, w, wu , wπ ). We
19

start by computing the log-likelihood of observing data for a specific user i with the taste profile
λi :
log Li (λi ; ω) = log Pi (Ri ) + log Pi (Si |Ri ) + log Pi (yi |Si ) (9)
where ω is a vector of all unknown parameters, Pi (Ri ) is the likelihood of observing the rankings
Ri , Pi (Si |Ri ) is the likelihood of choosing a search set Si given the rankings shown to user i, and
Pi (yi |Si ) is the likelihood of a purchase yi ∈ Si given the search set Si . We compute the exact values
of log-likelihoods for purchases and rankings, log Pi (yi |Si ) and log Pi (Ri ), using the derived closed
form solutions in (4), (6), and (8). In addition, we approximate the search likelihood, log Pi (Si |Ri ),
as described below. We then estimate parameters ω and types λi by maximizing the total log-
likelihood across N users in the dataset, computing it as LogL(y, S, R) = (1/N ) N
P
i=1 log Li (λi ; ω).
The main challenge comes from computing the term log Pi (Si |Ri ), which contains a summation
over a very large number of possible search sets S 0 :
X
log Pi (Si |Ri ) = (miS /ση ) − log exp(miS 0 /ση ) (10)
S 0 ⊆Ji
Computing this summation is computationally burdensome, so we need to approximate it. However,

we cannot easily form an unbiased estimator of this log-likelihood because of the non-linearity
introduced by the logarithm. To solve this issue, we follow Ruiz et al. (2020) and apply the one-
vs-each bound from Titsias (2016) to write:
X m
iS − miS 0
log Pi (Si |Ri ) ≥ log σ (11)
ση
S 0 ⊆Ji
1
where σ(x) = 1+e−x
is the sigmoid function. Therefore, instead of maximizing the log-likelihood
function in (10), we can maximize a lower bound of this function. While replacing the objective
function with its lower bound may introduce bias, in practice we found that the bound is sufficiently
tight, and that we are able to recover the true values of parameters when using it in estimation.
Since applying this bound moves the logarithm function under the summation, we can form
an unbiased estimator of the summation via subsampling. Specifically, we sample potential search
sets S 0 from the universe of all possible search sets on Ji , and we approximate the right-hand side
expression in (11) using the following unbiased estimator:
|Si | X
log σ (miS − miS 0 )/ση (12)
|Bi | 0
S ∈B
where Si is the set of all possible search sets the user i could form given rankings Ri , and Bi ⊆ Si
are (feasible) alternative sets we sample that are different from the set Si actually selected by user
i. In the Appendix C, we explain how we select the alternative search sets Bi in actual estimation.
20

3.4 Identification
Position effects p2 , . . . , p11 . We identify position effects using exogenous variation in rankings
displayed in the non-personalized group. Our model of non-personalized rankings in (5) uses mean
utilities ūij to capture the average item popularity, and it uses time-variant item characteristics
zjt to capture promotions of new and sponsored items. This specification allows us to isolate the
residual within-item variation in rankings by capturing it with random shocks µhij . By design of
Wayfair’s non-personalized algorithm, these shocks are conditionally independent from user-specific
tastes uij ; therefore, the isolated variation induces exogenous shifts in item rankings rij which we
use to identify position effects p2 , . . . , p11 . In practice, we estimate position effects using only non-
personalized data, and we extrapolate these estimates to the personalized sample. To this end,
we divide the estimates by the price coefficient ᾱ to convert position effects into dollar terms,
and we fix the parameters p2 , . . . , p11 at these dollarized values throughout our estimation in the
personalized sample. The main underlying assumption is that personalized rankings do not directly
influence position effects, that is, the dollar values of parameters p2 , . . . , p11 are the same in both
experimental groups.
This approach to estimating position effects differs from the prior literature where researchers
used a regression discontinuity approach (Narayanan and Kalyanam, 2015), a propensity-score esti-
mation (Schnabel et al., 2016), or experiments in which rankings are fully randomized (Ursu, 2018;
Ferreira et al., 2016). While these researchers aimed to maximize exogenous variation in rank-
ings, we want our analysis to recognize that rankings are endogenous in order to infer tastes from
personalized rankings. We therefore use a hybrid approach that exploits exogenous variation in
non-personalized rankings, while also recognizing that personalized rankings are endogenous with
respect to users’ tastes and can therefore be used as a source of preference information. A poten-
tial advantage of our approach over fully randomized experiments is that random rankings might
show users irrelevant and unappealing products, thus making them think the ranking algorithm is
unreliable. This could, in turn, affect users’ beliefs, and therefore choices, in unpredictable ways.
Search cost c and scale parameter ση . The baseline search cost c is identified from the
average number of items searched by users. Conditional on the selected search set Si , the purchase
decision depends only on tastes but not on search costs; therefore, we can separate search costs
from taste parameters by using conditional purchase probabilities. Additionally, we identify the
scale parameter ση from the extent to which the model can explain the observed searches using
item prices pjt and attributes xj and ξj . The estimated value of ση then indicates whether the
observed search sets provide useful information for estimating taste heterogeneity.
Tastes αi and βi . We now explain how we identify mean tastes as well as taste heterogeneity
from rankings, searches, and purchases in the personalized sample. We identify the mean tastes
β̄ from two key sets of moments: (a) users’ propensity to search and purchase items with certain
values of attributes xj , and (b) the retailer’s propensity to display items with certain values of
21

attributes xj in the top positions of personalized rankings. Consider an example in which most
users prefer wooden beds over beds from other materials. The retailer will then frequently fill top
positions on the page with wooden beds, and most users will often search wooden beds even when
they are not displayed at the top. Therefore, conditional on position effects, we identify the mean
tastes β̄ from the average patterns in search and ranking data.
The identification of the mean price coefficient ᾱ is somewhat different because the price of a
given item may vary over time. We therefore identify the average price sensitivity ᾱ from the extent
to which temporary price discounts increase search and purchase probabilities of the discounted
items and shift these items to higher positions in rankings. Recovering ᾱ enables us to translate
personalization benefits into dollar terms, thus producing interpretable estimates of consumer sur-
plus. One may worry that within-item price variation correlates with unobserved temporal demand
shocks, e.g., with seasonal demand fluctuations or temporary advertising campaigns. However, our
conversations with the pricing team at Wayfair have revealed that such endogeneity is not a large
issue in the product category we analyze. As it turns out, much of the temporal price variation we
observe comes from a sequence of rotating price experiments, which affected almost half of all the
items in our dataset.16 We have also verified that the temporary price discounts we observe in the
data rarely coincide with obvious candidates for demand shifters such as weekends and holidays.
Based on these observations, we assume throughout our analysis that prices pjt are exogenous with
respect to unobserved taste shocks.
Next, we identify the heterogeneity in tastes λi from the extent to which user-specific rankings
and searches are concentrated around items with similar attributes. Consider, for example, a pair
of beds j and k that are frequently searched together and belong to the same furniture style. If all
users had identical tastes for furniture styles β̄Style , the fact that a user searched bed j would give
us no new information about this user’s tastes for style, βiStyle . Seeing this user searching bed j does
not help us predict whether the same user will also search bed k. However, suppose we find that
in our data searching bed j is highly predictive of searching on bed k. Given the structure of our
model, we would rationalize this pattern by concluding that users have heterogeneous tastes βiStyle
for furniture styles. In Appendix B, we document that such co-search patterns arise for most of
the observed item attributes; therefore, we can identify taste heterogeneity for different attributes
directly from the observed co-search patterns.
Another set of moments we use to identify heterogeneity is based on the observed personalized
rankings. According to the ranking model in (7), the retailer infers each user’s tastes δij from
historical data and personalizes rankings accordingly. Therefore, the fact that the retailer shows
different rankings to different users is itself informative about taste heterogeneity. For instance,
consider a pair of beds j and k that have the same style (e.g., modern). For users who previously
revealed a strong preference for modern furniture, the retailer may choose rankings that place both
beds j and k at the top. By contrast, the retailer may remove both of these beds from rankings of
16
At the time, Wayfair was conducting a series of rotating price experiments in which they would cycle through
pre-specified blocks of items. At each point in time, the company would randomize prices of items in the selected
block, while also setting optimal prices of all other items based on the proprietary pricing algorithm.
22

users who have revealed themselves to have either neutral or negative taste for modern furniture.
We can therefore identify heterogeneity in users’ tastes for style βiStyle from the extent to which
personalized rankings consistently display beds of the same style next to each other. Following
the same logic for different item attributes, we can identify taste heterogeneity from co-ranking
patterns in the data.17 In the Appendix B, we document such co-ranking patterns for most of the
item attributes in our data.
This identification argument distinguishes our approach from the prior work, which primarily
recovered taste heterogeneity using panel data or repeat purchases (Rossi et al., 1996, 2012) or
search data (Kim et al., 2010). As is the case for most durable goods, panel data on purchases are
unavailable in our application. Additionally, a typical user in our data only searches a few items,
which limits how much we can learn about these users’ tastes from search data.18 By contrast, data
on personalized rankings contain information about all items shown to a user rather than only items
the user searched. Since displayed rankings partly reveal information the retailer has learned about
users’ tastes from their browsing histories, ranking data potentially contains rich information about
taste heterogeneity. Our approach incorporates these data into estimation, while at the same time
recognizing that rankings might be imperfectly correlated with user utilities due to profit-driven
distortions.
Latent attributes ξj and heterogeneity of tastes θi . We now discuss how we identify latent
attributes and associated taste heterogeneity. Consider a pair of beds j and k that are frequently
searched together and often displayed together in the top positions of personalized rankings. These
beds must appeal to users with similar tastes. Suppose, however, that these co-search and co-
ranking patterns do not correlate with any of the item attributes xj we observe in the data. Given
the structure of the utility model, we then infer that beds j and k are located close to each other
in the space of latent attributes ξj . We can then rationalize the data patterns above by assuming
that the two beds have similar values of a certain latent attribute and that a significant share of
users has strong tastes for this attribute. Therefore, we identify latent attributes ξj from co-search
and co-ranking patterns that cannot be explained by the similarity of observed attributes xj .
We emphasize that it is not possible to identify specific parameters of the latent factorization
ξj0 θi . To see this, note that if a latent attribute ξjm is perfectly collinear with some observed
attribute xkj , it is then impossible to separate the corresponding taste parameters θim and βik from
each other. The latent attributes ξj are also interchangeable and therefore suffer from the label
switching problem. But while we cannot identify separate parameters in this factorization, we can
identify (a) the sum ξj0 θ̄ which essentially plays a role of an item-specific residual similar to Berry
17
Consistent with this identification argument, our estimated model predicts the highest correlation of utilities for
those pairs of items that are frequently searched together and are displayed together to the same users. For example,
we predict correlation of utilities 0.4-0.5 for pairs of items that are searched together by at least 100 users in the
data, whereas we estimate the correlation below 0.05 for pairs of items that are never searched together.
18
This is a salient feature of most consumer search datasets. For example, that the average user searches 2.3
options when booking hotel rooms (Chen and Yao, 2016), clicks on 1.8-2.4 items when shopping for cosmetics
products (Morozov et al., 2021), visits 1.1-2.0 auto dealerships (Yavorsky and Honka, 2019), requests 2-3 quotes
for auto insurance (Honka, 2014), and examines 2.3 vehicles when comparing used cars (Gardete and Antill, 2019).
23

et al. (1995), and (b) the pairs of items for which the utilities are correlated, which helps identify
the correlation structure of utilities uij .
Fortunately, identifying the averages ξj0 θ̄ and pairwise correlations of item utilities is all we need.
The main goal of our counterfactual analysis is to examine whether users benefit from personalized
rankings. To answer this question, we need to predict what items users would have searched
and purchased had they been assigned to a non-personalized group, and had they encountered
different choice sets Ji and rankings rij . We therefore need to infer to which items users would
have substituted, and our ability to do such inference directly relies on our knowledge of the utility
averages and correlations. Therefore, we can identify the key counterfactual quantities even though
that we cannot identify specific components of the latent factorization.
Ranking algorithm weights wu and wπ . To identify the weights wu and wπ in the ranking
algorithm (7), we contrast the actual tastes of users with the personalized rankings they are shown.
It helps to think about this estimation problem as recovering two objects: the utility weight wu
and the ratio of weights wπ /wu . We identify the utility weight wu from the extent to which users
see the highest-utility items at the top positions. This weight will generally be high if the retailer
knows users’ tastes well and shows rankings that are highly aligned with these tastes. We note that
the estimated value of the weight wu will also show to what extent personalized rankings contain
relevant information for recovering users’ tastes. Next, to identify the ratio wπ /wu , we examine
whether highly profitable items (i.e., high πij ) are more frequently shown in the top positions than
would be optimal under utility-based rankings with wπ = 0. For example, if the retailer displays
expensive, high-margin beds more often than warranted by the mean price sensitivity ᾱ, the size
of the discrepancy indicates how much weight the retailer puts on profitability relative to utility.
4 Estimation Results
We estimate our model using the Maximum Likelihood approach described in Section 3.3. The
main computational challenge is how to deal with a large number of users N and items J. To ease
the computational burden, we estimate a non-personalized model using a random subsample of
N hold = 50, 000 users in the non-personalized group. We then construct an equal-sized personalized
subsample of N pers = 50, 000 users by randomly drawing them from the personalized group. We
then use the remaining data from both groups, which are not included in the estimation samples,
for out-of-sample model validation (see Appendix D for details). One practical issue is how to select
items. It would be overly ambitious to attempt estimation of latent factors ξj for all thousands of
items in our data, especially given that most of these items were never purchased in our sample.
To reduce the product assortment to a more manageable size, we keep only items that have market
shares above 0.1%, which leaves us with J = 243 unique items.
24

Parameter Coef. Est. S.E. Parameter Coef. Est. S.E.
Search costs: Taste parameters:
Position 1 (baseline) c 0.040 (0.001) Price coefficient ᾱ -0.317 (0.054)
Position 2 c + p2 0.046 (0.002) Scale parameter ση 0.039 (0.003)
Position 3 c + p3 0.050 (0.001)
Position 4 c + p4 0.053 (0.002) Algorithm parameters:
Position 5 c + p5 0.061 (0.002) Weight on avg util. w 0.483 (0.062)
Position 6 c + p6 0.066 (0.002) New item boost γ1 0.072 (0.001)
Position 7 c + p7 0.073 (0.002) Spons. item boost γ2 1.376 (0.013)
Position 8 c + p8 0.078 (0.003)
Position 9 c + p9 0.083 (0.003)
Position 10 c + p10 0.088 (0.003)
Positions 11-48 c + p11 0.100 (0.001)
N users 50,000
J items 243
LogL -206.9
Table 3: Selected parameter estimates from the model of non-personalized rankings. We obtain
these estimates using a Maximum Likelihood estimation procedure developed in Section 3.3. The sample
used in this estimation includes N = 50, 000 users randomly selected from the non-personalized group. We
observe these users choosing among J = 243 unique items. The reported LogL value corresponds to the
average log-likelihood value at the optimum, where the average is taken across N users in the sample.
4.1 Position Effects

We start by estimating position effects from non-personalized data. To this end, we use the log-
likelihood function (9) while assuming that rankings are determined as in equation (5). Table 3
presents the key estimates from this estimation, while Figure 3 (left panel) interprets the estimated
search costs c and position effects p2 , . . . , p11 by converting them into the implied dollar values
of search costs by position. We make several observations based on these estimates. First, we
obtain relatively large estimates of search costs that vary between $12.5 and $31.5 depending on
the position. Given the predicted search probabilities for different positions, we obtain that users
pay a search cost of about $25 among items they actually search. This finding is natural given that
about 70% of users in the non-personalized sample do not search at all, and given that those who
search rarely look at more than 2-3 items (see Table 1). This large estimated search cost is also
in line with the results in other papers that obtain high estimates of search costs in datasets with
limited search (Chen and Yao, 2016; De los Santos and Koulayev, 2017; Ursu, 2018).
Second, we find evidence of strong position effects. While this search cost is $12.5 for the
first position, it increases by about $1.9 per position and almost triples by position 10, reaching
$27.6. Figure 3 (right panel, solid line) illustrates these estimated position effects by plotting the
predicted distribution of searches across positions. An item shown in the first position is about
twice more likely to be searched than an item in position 5, and three times more likely to be
searched than items in positions 10-15. Moving an item from position 1 to position 48 at the
bottom of the page reduces its search probability more than ten times. The same figure (right
25

Figure 3: Estimated search costs and implied position effects. The graph on the left shows the
estimates of search costs for the first ten positions of the page, which we obtained from the non-personalized
model (see Table 3). The solid line in the graph shows point estimates, while the dashed lines indicate the
95% confidence intervals. The graph on the right shows the distribution of searches across positions for the
estimated model (solid line, “estimated”) and compares it to the distribution of searches in a counterfactual
model from which we have removed position effects (dashed line, “counterfactual”).
panel, dashed line) also shows the predicted search probabilities when we fix search costs for all
positions at the average level of $25. The comparison reveals that shutting down position effects
generates a more even distribution of searches across positions and reduces the search rates of items
at the top five positions by a factor of 2-3. Note, however, that higher positions still attract more
searches, reflecting the fact that these positions are generally filled with more appealing items.
The strong estimated position effects are consistent with the results of our randomized experiment,
which reveal that personalized rankings substantially affect users’ search and purchase behavior
(see Section 2.2).
4.2 Retailer’s Incentives

Armed with the estimates of position effects, we now study the extent to which personalized rank-
ings guide users toward highest-utility items. To this end, before estimating the full model of search
and rankings from Section 3.3, we first estimate mean user tastes λ̄ using only data from searches
and purchases, and we compare the resulting estimates with those obtained using only data on
displayed personalized rankings. Estimating tastes λ̄ from searches and purchases helps us infer
the “actual” user tastes, denoted as λ̄U . For this estimation, we only use two terms of the likelihood
function in (9): the purchase likelihood log Pi (yi |Si ) and the search likelihood log Pi (Si |Ri ). By
contrast, estimating mean tastes from rankings helps us understand what kind of items are favored
by the current personalization algorithm. We let λ̄R denote the resulting vector of tastes estimated
from rankings. For this estimation, we only use the ranking likelihood log Pi (Ri ) based on the
personalized ranking equation (7), and for the moment we set the profitability weight wπ to zero
26

Figure 4: Comparison of estimated mean user tastes obtained only from choices versus from
rankings. Both graphs show the estimates of mean tastes λ̄ obtained from two estimators: (1) using only
data on searches and purchases (the first estimate on the left for each attribute); and (2) using only data on
personalized rankings without accounting for search and choice (the second estimate on the right for each
attribute). The bars around each point estimate are 95% confidence intervals.
(we relax this assumption below). Comparing the resulting estimates λ̄U and λ̄R allows us to con-
trast which attributes users are looking for and which attributes are promoted by the personalized
rankings. If the retailer uses personalized rankings to steer users away from high-utility items and
toward profitable items, we would then expect the implied tastes λ̄R to deviate from the actual
user tastes λ̄U .
Figure 4 shows the estimates λ̄U and λ̄R for 20 observed attributes that enter the utility func-
tion (1).19 These attributes include price as well as several binary variables capturing bed’s size,
material, and style. Although these two sets of estimates were obtained from two completely differ-
ent information sources, the estimated tastes λ̄U and λ̄R are substantially aligned. The correlation
between the two sets of point estimates is 0.42. Beds with certain attributes, e.g., Size King, Style
Farmhouse, and Style Posh), are more appealing to users (positive λ̄U ) and tend to be often pro-
moted in the top positions of personalized rankings (positive λ̄R ). By contrast, beds with attributes
such as Material Metal, Style American, and Style Sleek are relatively undesirable to users (negative
λ̄U ), and the current algorithm either does not show them at all or displays them at the bottom of
the page (negative λ̄R ).
Despite this general alignment, we do observe that for several attributes, personalized rankings
deviate from the actual tastes of users. Notably, we estimate somewhat lower price sensitivity
from rankings than choices, implying that the retailer is more likely to show expensive items than
implied by the actual users’ tastes. We also obtain estimates of different signs for several attributes,
including Size Queen, Style Glam, and Style Contemporary. While these attributes are desirable
19
Since λ̄U is only identified with respect to the normalized scale σε , and λ̄R is identified with respect to another
scale σµp , we cannot directly compare tastes λ̄R and λ̄U with each other. We therefore normalize each taste vector,
dividing it by the estimated taste parameter λ̄k for one of the attributes that is not shown in the figure.
27

Parameter Coef. Est. S.E. Parameter Coef. Est. S.E.
Taste parameters and search costs: Algorithm parameters:
Baseline search cost c 0.036 (0.007) Weight on avg util. wu 1.078 (0.484)
Price coefficient ᾱ -0.294 (0.104) Weight on wπ 0.179 (0.038)
profitability
Scale parameter ση 0.029 (0.010)
N users 50,000 LogL -196.9
J items 243
Table 4: Selected parameter estimates from the model of personalized rankings. We obtain these
estimates using a Maximum Likelihood estimation procedure developed in Section 3.3. The sample used in
this estimation includes N = 50, 000 users randomly selected from the personalized group. We observe
these users choosing among J = 243 unique items. The reported LogL value corresponds to the average
log-likelihood value at the optimum, where the average is taken across N users in the sample.
according to the estimated users’ tastes, the current algorithm tends to show items with these
attributes in relatively low positions on the page. Overall, we find that what personalized rankings
show is correlated (but is not perfectly aligned) with the actual users’ tastes. It is then natural to
ask whether and to what extent the documented deviations from the actual tastes affect consumer
welfare.
4.3 Welfare Effects of Personalized Rankings

We estimate the full model with search and rankings by using the likelihood function in (9) and
the sample of N pers = 50, 000 users with personalized rankings. For this estimation, we use data
on searches, purchases, as well as personalized rankings that were displayed to each user. We fix
the position effects p2 , . . . , p11 at the level at which we pre-estimated them from non-personalized
data in Section 4.1. Table 4 shows the point estimates and bootstrap standard errors for the
key parameters in the full model . We estimate the search cost parameter to be 0.036, which
corresponds to the baseline search cost of $12.3. Since this estimate is almost identical to that from
the non-personalized sample (see Table 3), and the difference is not statistically significant at a
95% confidence level, we do not find any strong evidence that personalized rankings substantially
reduce users’ search costs (e.g., by making it more enjoyable to search).
We also obtain reasonable estimates of taste heterogeneity. Figure 8 in Appendix D visualizes
the distribution of the estimated individual tastes αi and βi . An average user prefers beds of
certain size (e.g., Queen and King), material (e.g., Fabric), and style (e.g., Rustic and Posh),
which is broadly consistent with the estimates we obtained when using only choice data (see Figure
4). We estimate substantial preference heterogeneity with respect to most of the observed attributes
xj . The two included latent attributes ξj also capture meaningful taste heterogeneity, previously
not captured by prices pjt and observed attributes xj , which further justifies our latent factorization
approach.
Turning to the estimated ranking algorithm, we estimate the weights in equation (7) to be
28

∆CS Per User % of Total ∆CS
Estimate S.E. Change Aggregate
Total surplus change $3.08 (1.23) 100.0 $5.94M
(a) Search costs -$1.58 (0.48) 24.9 -$3.05M
(b) Purch. prob. $2.30 (0.96) 36.2 $4.44M
(c) Match value $2.46 (0.67) 38.8 $4.55M
Table 5: The effect of personalized rankings on consumer surplus. We compute the change in the
expected ex-ante surplus in the first row using the equation (13). In the remaining rows, we decompose the
total surplus change into the effects of changing (a) the total search costs paid by the user, (b) the purchase
probability, and (c) the expected utility conditional on marking a purchase (see equation (14) in Appendix
C for details). The aggregate estimates of the surplus change are computed by multiplying the average ∆CS
estimate by the total number of users in the personalized sample (N = 1, 930, 992).
ŵu = 1.078 for utility and ŵπ = 0.179 for profitability. So while personalized rankings are mostly
aligned with user’s utilities δij , the retailer also puts a considerable weight on profitability, thus
occasionally showing items that are expensive but not necessarily the most appealing to users.
We now ask how this profit-driven distortion affects consumer welfare. To this end, we generate
a sample of users from the estimated distribution of tastes λi , and we simulate their behavior
under two ranking algorithms: personalized and non-personalized. For the personalized scenario
we generate rankings using the estimated model in (7), whereas in the non-personalized scenario
we generate rankings from the model in (5) that we estimated from the non-personalized sample.
In both scenarios, we define the ex-ante consumer surplus of each user λi as follows:
1 X X X X
CSi (λi ) = PRi PiSi |Ri log( exp(δij )) − cij (13)
αi
Ri ∈R Si ∈S j∈Si j∈Si
where the first summation is over all possible rankings R, the second summation is over all possible
search sets S, and the expression in the brackets is the expected net utility from searching all
items in the set Si . We approximate these two summations using simulation, i.e., we draw rankings
Ri and search sets Si for each user i and average across the resulting net utility values. Having
computed the consumer surplus CSi (λi ) for each user, we then average across users to compute
the expected consumer surplus CS. Below, we also decompose CS into the effect of total incurred
search costs, the purchase probability, and the utility obtained conditional on a purchase (see the
Appendix C for the formal derivations).
Table 5 shows the welfare results. We find that personalized rankings increase the average
consumer surplus by $3.1, an increase of approximately 23% compared to non-personalized rankings.
This surplus increase constitutes around 1.5-2% of the average item price in this category. While
this effect may seem small, one should keep in mind that the probability of purchase in the estimated
model is less than 5%. Therefore, the surplus increase conditional on purchasing is almost 40%
of the average item’s price. Aggregating this estimate across all users in the initial sample of
N = 1, 930, 992, we obtain that personalized rankings generate a substantial additional surplus of
$5.94 million.
29

The remaining rows of Table 5 show the decomposition of this surplus change. About 25%
of the change is driven by search costs. Specifically, consumer surplus decreases because users, on
average, search more items. This decrease, however, is more than offset by positive effects generated
by a higher purchase probability (36.2% of the change) and the fact that conditional on a purchase,
users discover and buy better-matching items (38.8% of the change).
Our results above show that, despite profit-related distortions in the algorithm, personalized
rankings are highly beneficial to users. We further illustrate this point in Figure 5, where we explore
other ranking algorithms the retailer could have chosen. To construct these alternative algorithms,
we fix the sum of the two weights at the estimated level so that wu + wπ = 1.078 + 0.179 = 1.257,
and we then change the profitability weight wπ to values above and below its estimated level
(ŵπ = 0.179). Since the sum of two weights is fixed, increasing the profitability weight wπ also
decreases the utility weight wu .20 Changing the weights in this way allows us to explore what
consumer surplus and revenues would have been under alternative ranking algorithms available to
the retailer.
In Figure 5 (left panel), we show the predicted revenues and consumer surplus under differ-
ent weights wπ , reporting both outcome variables relative to their values under non-personalized
rankings. The blue solid line shows the expected ex-ante consumer surplus from equation (13),
the red dashed line shows the expected revenue, and the vertical dashed line depicts the current
personalization algorithm that corresponds to the estimated weights ŵu and ŵπ . Additionally, the
right panel of Figure 5 visualizes the Pareto frontier of consumer surplus and revenues, showing
the values of the two objectives that can be achieved within the specified family of personalization
algorithms. Based on these results, we make two key observations about the current algorithm. On
the one hand, the retailer could have further increased consumer surplus by putting zero weight on
profitability (wπ = 0). Such a change would increase consumer surplus by about $1.7 per user, thus
increasing it to the level $4.9 above the consumer surplus under non-personalized rankings, but it
would also dramatically reduce the expected revenues. On the other hand, the retailer could have
further increased revenues by putting a higher weight on profitability (wπ ≈ 0.35) and obtaining
the revenue almost 7% higher than under non-personalized rankings (as opposed to 5.8% in the
current algorithm). Such a change, however, would make users substantially worse-off; in fact, the
consumer surplus would drop by about $9, falling well below the level of non-personalized rankings.
These results suggest that, when solving the trade-off between maximizing short-term utility and
short-term revenues, the retailer has settled for a personalization algorithm that balances between
these two objectives and that ultimately benefits both the retailer and the users.
20
To gain formal intuition behind this counterfactual, consider the initial formulation of the ranking model in
equation (7). Suppose the raw weights w̃u and w̃π are related to the estimates such that w̃u = ŵu /(ŵu + ŵπ ) and
w̃π = ŵπ /(ŵu + ŵπ ), so the weights add up to one. By normalizing the variance to σµ2 = 1/(ŵu + ŵπ )2 , one obtains
a ranking equation that is equivalent to the estimated model. We can then think about the main counterfactual as
changing the weight w̃π while maintaining that the weights w̃u and w̃π sum up to one.
30

Figure 5: Consumer surplus and retailer revenues under alternative ranking algorithms. The
left figure shows ex-ante consumer surplus and the expected retailer’s revenues under alternative personalized
ranking algorithms with different profitability weights wπ . The blue solid line shows the expected ex-ante
consumer surplus from equation (13), the red dashed line shows the expected revenue, and the vertical
dashed line depicts the current personalization algorithm that corresponds to the estimated weights ŵu and
ŵπ . The right figure shows the Pareto frontier of consumer surplus and revenues, showing the values of the
two objectives that can be achieved within the specified family of personalization algorithms.
4.4 Discussion of Results

Our main motivation was to explore whether online retailers have incentives to nudge consumers
toward profitable but low-utility items by using personalized recommendations. Although such
profit incentives might be strong in theory, our results suggest that they may not be particularly
strong in practice. Specifically, the case study we present here shows that personalized rankings, in
a way that Wayfair has implemented them, have generated a substantial surplus that was to a great
extent internalized by Wayfair’s consumers. Even though we find some evidence of profit-driven
distortions, such distortions appear too weak to negatively affect consumer surplus. As a whole,
our results show that in this context, personalized rankings increased overall efficiency by matching
consumers to better-suited items, which increased the volume of transactions and ultimately made
both the retailer and consumers better-off.
A natural question to ask is whether we expect these results to generalize. For example, one
may wonder to what extent other large online retailers might be facing similar incentives that
induce them to engage in “benevolent” personalization. The only way to answer this question con-
clusively is to repeat our analysis across different retailers and product categories. Nevertheless,
we conjecture that online retailers may generally have incentives to offer personalized recommen-
dations that are beneficial for consumers. On the one hand, retailers may indeed want to optimize
short-term profits by recommending profitable, high mark-up items. On the other hand, providing
helpful recommendations might be a better long-term strategy, as it may lead to higher customer
loyalty, better user retention, and stable long-term growth. Doing so might also help avoid losing
customers to a competing retailer who offers more helpful personalized recommendations. Our view
31

is that, for these reasons, any online retail company interested in building reputation and maxi-
mizing long-term growth will generally want to put a substantially large weight on maximizing
user utility. Such a company would be unlikely to implement recommender systems in a way that
harms consumers and reduces consumer welfare. As the company matures and loses its incentives
to build a reputation and maximize growth, it might shift its focus on monetizing the existing
personalization algorithm and maximizing short-term profits. Therefore, one testable hypothesis is
that older, more established companies might implement less user-centric and more profit-centric
personalized recommendations. Empirically testing this hypothesis is a promising area for future
work.
Of course, to make generalizable conclusions, one would need to study the effects of personaliza-
tion more broadly, across different websites and markets. Drawing generalizable conclusions would
be valuable both for academic researchers as well as regulators who seek to increase algorithmic
transparency. It is interesting to discuss how researchers could approach such broad analysis. Our
case study relies on confidential data obtained directly from the retailer, which gives us a unique
opportunity to scrutinize one specific personalization algorithm. Given that large online companies
such as Wayfair, Pandora, and Ziprecruiter are increasingly allowing researchers to use their data
and analyze their personalization strategies, we are hopeful that our analysis can be replicated and
extended in collaboration with other companies as well. Additionally, our view is that personal-
ization algorithms can (and should) also be studied in contexts where it is not feasible to access
proprietary data. This could be done by using state-of-the-art scraping tools that imitate website
visits of users with different profiles (e.g., from different locations), or by crowdsourcing data di-
rectly from website users. In this vein, the recent report of the European Parliament has called
for additional research on “reverse engineering the black-box algorithms”.21 Several groups of re-
searchers have attempted to monitor YouTube’s recommendation algorithm by repeatedly scraping
video recommendations (Roth et al., 2020; Faddoul et al., 2020); one could apply similar tools to
study personalized recommendations in online retail. We hope that these initial efforts to monitor
the existing recommendation algorithms will pave the road for future studies of how personalization
affects the online experience of consumers.
5 Conclusion
In this paper, we explored whether personalized rankings in online retail benefit consumers. We be-
gan by analyzing the results of a randomized experiment which revealed that personalized rankings
make consumers search more, increase the purchase probability, and redistribute demand toward
relatively unpopular, niche items. We then developed and estimated a choice model, which enabled
us to recover heterogeneous users’ tastes from data on searches, purchases, and observed rankings,
and which helped us to empirically separate tastes from position effects. Having estimated this
model, we showed that personalized rankings substantially increase both consumer surplus and the
21
See “A governance framework for algorithmic accountability and transparency” (Koene et al., 2019).
32

retailer’s revenues. We therefore did not find any strong evidence that the retailer in our case study
used personalized rankings to increase profitability at the expense of reducing consumer welfare.
Of course, our analysis is narrow in the sense that we focus on a specific retailer and product
category. While this narrow sample definition helps us to develop a realistic choice model and
formulate an accurate model of rankings, we cannot immediately extrapolate our results to other
product categories or other retailers. Yet, our analysis is sufficiently general to help us draw several
broader lessons. By being systematic about discussing the main empirical challenges, we have
provided a conceptual framework that may help researchers estimate demand in contexts with
many products, few observed attributes, and access to search and ranking data. Going forward,
researchers may apply this framework to datasets from different retailers and categories to establish
whether the personalization effects we document here generalize to other contexts.
One intriguing question is why personalized recommendations make such a large difference
even though the retailer is already offering its users multiple search tools (e.g., search queries,
sorts, filters). We believe that this benefit occurs, in part, because the existing search tools and
personalized recommendations cater to different types of consumers. Search tools may be especially
helpful to consumers who broadly know what they are looking for and simply need to hone in on
a set of products with specific attributes (e.g., blue sectional sofas). By contrast, personalized
recommendations are mostly helpful to consumers who do not know how to narrow the scope of
their search and are simply looking to explore available options. To further understand how benefits
from personalization are distributed across consumers, future research may need to document the
prevalence of these consumer types and quantify their benefits from personalization.
33

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37

A Experiment Details: Randomization Checks
In the experiment we describe in Section 2.1, Wayfair assigned 95% of new website visitors to the
personalized group and the remaining 5% to the non-personalized group where users see bestseller-
based rankings. To verify that this assignment rule was implemented correctly, we conduct several
randomization checks. First, we compare the general shopping habits of users in two groups. Al-
though personalized rankings can make users search more and purchase with a higher probability,
such rankings are unlikely to affect the basic shopping habits of users, e.g. whether they are primar-
ily shopping on Wayfair’s website during late evenings, and whether they do most of their shopping
during weekends. In the first two rows of Table 6, we show that in both groups, personalized and
non-personalized, around 39.8% of users mostly visit the website late at night (i.e. between 8 PM
and 2 AM) and approximately 31.8% of users mostly visit the website on weekends. We find that
these shares are almost identical in two groups and that the difference between groups is neither
economically nor statistically significant.
Second, we verify that users were equally likely to be assigned to the personalized group, re-
gardless of when they first visited the product category. Since we do not observe complete user
histories, we cannot definitively infer the date and time of each user’s first visit. To circumvent this
issue, we focus on users who did not make a single visit in September 2019 but made at least one
visit in October 2019. Assuming these users did not visit this product category before September,
we identify the earliest search session for each user from our data and consider it their first category
visit. In Figure 6, we plot the share of users assigned to the personalized group as a function of the
date (top panel) and the hour (bottom panel) of their first visit. As expected, 95% of new visitors
were assigned to the personalized group on each day, and the assignment share did not deviate
from 95% by more than 0.1-0.2 percentage points for the majority of dates. Similarly, the bottom
panel of the same figure shows that the assignment share remained stable across different hours of
the day.
In Table 6, we test whether the timing of the first visit is comparable for users in the two
randomized groups. According to the results, users in the two groups are equally likely to make their
first visits on specific days of the week, as none of the differences are economically or statistically
significant. We repeat this comparison using the time of the first visit, and we find the timing in
the two groups to be comparable, with the one exception that users are somewhat more likely to be
assigned to the non-personalized group when their first visit is in the morning between the hours
of 6 AM and 12 PM. Since the difference in the share of morning visitors is only around 2.4%,
however, this discrepancy is unlikely to introduce a major bias in the estimated treatment effects.
Finally, we also verify the balance of the demographic variables in the two experimental groups.
In Table 7, we show that users in the personalized and non-personalized groups are statistically
similar in several dimensions, including age, gender, income, net worth, the area of the current
residence, years lived in the current home, dwelling type, ownership status (i.e., renter vs. owner),
and whether they live in an urban area. Out of all these variables, only age shows a statistically
significant difference between the two groups. We find once again, though, that the difference is
38

economically small, as users in the non-personalized group are only about 1.4 months older than
those in the personalized group. Overall, we conclude that the randomization did not deviate from
the target 95% assignment rule in any way that could introduce bias to the estimated causal effects
of personalized rankings.
Figure 6: Randomization checks. The graphs show the proportion of new users assigned to the person-
alized group as a function of the date of the first visit (top panel) and the time of the first visit (bottom
panel). To identify the timing of the first visit, we focus on users who did not visit the website in September,
and we document the day and time of their first visit in October. The dashed lines in both graphs indicate
the target assignment rate of 95%.
39

Experimental group of users Difference Difference
Non-Person. Personalized Value P-value
Most sessions on weekends 0.3182 0.3187 0.0004 0.8566
Most sessions late at night (8 PM-2 AM) 0.3984 0.3975 -0.0009 0.7201
Day of the first visit:
Monday 0.1362 0.1359 -0.0003 0.8632
Tuesday 0.1525 0.1542 0.0017 0.3675
Wednesday 0.1613 0.1619 0.0006 0.7446
Thursday 0.1446 0.1419 -0.0027 0.1373
Friday 0.1115 0.1126 0.0011 0.5026
Saturday 0.1335 0.1316 -0.0019 0.2837
Sunday 0.1604 0.1619 0.0015 0.4422
Time of the first visit:
0-6 AM 0.1357 0.1363 0.0006 0.7522
6-12 AM 0.2222 0.2170 -0.0052* 0.0187
12-3 PM 0.1555 0.1559 0.0004 0.8196
3-6 PM 0.1509 0.1544 0.0035 0.1250
6-9 PM 0.2049 0.2047 -0.0002 0.9137
9-12 PM 0.1308 0.1318 0.0010 0.5931
Table 6: Randomization checks: visit timing. The first two columns show the values of variables for
users assigned to the personalized and the non-personalized group, the third column shows the difference
between these two groups, and the last column reports p-values from the two-sided t-tests. To identify the
timing of the first visit, we focus on users who did not visit the website in September and document the day
and time of their first visit in October. Therefore, the variables day of the first visit and time of the first
visit are computed only for these selected users. Significance: * p < 0.05.
Experimental group of users Difference Difference

Non-Person. Personalized Value P-value
Gender: Female 0.8207 0.8210 0.0003 0.8688
Age 48.47 48.35 -0.11* 0.0309
Annual Income ($) 105,990.4 105,667.5 -322.9 0.3708
Net Worth ($) 544,195.8 541,988.1 -2207.7 0.3834
Living Area (sq.ft) 2,433.6 2,435.7 2.1 0.8043
Years of Residence 10.68 10.65 -0.03 0.4678
Dwelling: Condo 0.0683 0.0688 0.0003 0.7339
Dwelling: Single Family 0.7950 0.7935 0.0015 0.4774
Dwelling: Mobile Home 0.0075 0.0075 0.0000 0.9598
Ownership: Renter 0.1629 0.1637 0.0008 0.6869
Urban Area Residence 0.3967 0.3954 -0.0013 0.5821
Table 7: Randomization checks: demographics. The table compares values of demographic variables
in the two experimental groups. All demographic variables were acquired by Wayfair from a third-party data
vendor. Income and net worth variables are imputed from the information on users’ zip codes. Significance:
* p < 0.05.
40

B Observed Co-search and Co-ranking Patterns
According to our identification argument in Section 3.4, we recover taste heterogeneity from the
extent to which users encounter and search beds with correlated attributes. In Tables 8 and 9,
we show that this correlation is strong for many observed attributes. Columns 1-4 in both tables
explore whether the fact that position 1 contains a bed with a certain attribute xk makes it more
likely that positions 2-10 contain at least one other item with the same attribute.22 Specifically,
for each binary attribute xk in our data (e.g., “Material: Wood” indicator), we regress an indicator
that positions 2-10 contain at least one attribute with xk = 1 on the indicator that position 1
contains the bed with the same attribute xk = 1. In columns 5-8, we estimate similar regressions
but for observed searches. Specifically, we select users whose rankings showed at least two beds
with attribute xk = 1 in the top ten positions, and we regress the search indicator of the second
bed with this attribute on the search indicator of the first bed (where “first” and “second” refer to
their relative positions in the product list).
We find strong evidence that personalized rankings consistently show beds with correlated
attributes. The coefficients in column 3 are precisely estimated and have large and positive values.
For example, seeing that a bed in position 1 belongs to a certain style (e.g., Bohemian or Glam
Style) makes it on average 56% more likely that the same user will be displayed at least one more
bed of that style in positions 2-10. We estimate the same probability increase to be 18% for
color, 21% for material (e.g., wood or metal), and 158% for design (e.g., platform bed or Murphy
bed). Similarly, the results in column 7 show that, when presented with such an opportunity, users
search beds with similar attributes. The estimated correlations are even stronger than those for
the rankings in column 3. For instance, searching the first displayed bed of a given style makes it
twice as likely that the same user also searches the second displayed bed of the same style. This
observation suggests that while personalized rankings and searches are both informative about taste
heterogeneity, searches represent a less noisy signal of tastes compared to observed personalized
rankings.
22
The focus on the ten top positions is somewhat arbitrary and merely reflects the fact that the majority of clicks
and purchases land on the ten positions at the top of the rankings. We experimented with taking the top five and
top twenty positions and obtained qualitatively similar results.
41

Attribute Attribute Correlation of attributes in clicks Correlation of attributes in rankings
Name Value Const. Std. Slope Std. Const. Std. Slope Std.
Est. Err. Est. Err. Est. Err. Est. Err.
Color Black 0.9539 (0.0003) 0.0374 (0.0003) 0.0639 (0.0003) 0.0730 (0.0009)
Blue 0.8190 (0.0004) 0.0701 (0.0011) 0.0577 (0.0004) 0.1372 (0.0011)
Brown 0.7649 (0.0005) 0.0722 (0.0012) 0.0729 (0.0005) 0.0738 (0.0013)
Gray 0.9602 (0.0002) 0.0306 (0.0004) 0.0660 (0.0003) 0.1273 (0.0009)
Green 0.5019 (0.0006) 0.0028 (0.0020) 0.0686 (0.0009) 0.1539 (0.0022)
Orange 0.0524 (0.0002) 0.0070 (0.0035) 0.0516 (0.0094) 0.1484 (0.0279)
Pink 0.3859 (0.0005) 0.1627 (0.0022) 0.0706 (0.0013) 0.1750 (0.0027)
Purple 0.3735 (0.0005) 0.2483 (0.0028) 0.0570 (0.0011) 0.1903 (0.0028)
Red 0.1049 (0.0003) 0.1118 (0.0038) 0.0516 (0.0030) 0.1106 (0.0088)
White 0.9215 (0.0005) -0.1760 (0.0008) 0.0624 (0.0004) 0.1316 (0.0010)
Yellow 0.0214 (0.0002) 0.3495 (0.0030) 0.0636 (0.0049) 0.1471 (0.0131)
Unfinished 0.0115 (0.0001) 0.1479 (0.0024) 0.0528 (0.0067) 0.1332 (0.0265)
Design Bed Frame 0.6895 (0.0005) 0.3098 (0.0006) 0.0631 (0.0003) 0.0555 (0.0008)
Bookcase 0.0939 (0.0003) 0.6539 (0.0023) 0.0619 (0.0014) 0.1173 (0.0046)
Canopy 0.0182 (0.0002) 0.8775 (0.0011) 0.0984 (0.0030) 0.1765 (0.0056)
Elderly Beds 0.1037 (0.0003) -0.0938 (0.0039) 0.0531 (0.0120) 0.0581 (0.0408)
Four Poster 0.0253 (0.0002) 0.8602 (0.0012) 0.0923 (0.0027) 0.1947 (0.0053)
Murphy 0.0563 (0.0003) 0.9072 (0.0011) 0.0742 (0.0014) 0.1478 (0.0035)
Open Frame 0.7805 (0.0005) 0.1146 (0.0015) 0.0430 (0.0003) 0.1333 (0.0011)
Panel 0.9850 (0.0001) 0.0133 (0.0002) 0.0637 (0.0003) 0.1000 (0.0008)
Platform 0.0534 (0.0002) 0.3060 (0.0035) 0.0331 (0.0022) 0.0842 (0.0088)
Sleigh 0.0485 (0.0002) 0.5981 (0.0019) 0.0761 (0.0026) 0.0592 (0.0063)
Wingback 0.3239 (0.0005) 0.4798 (0.0024) 0.0754 (0.0011) 0.1941 (0.0025)
Material Fabric 0.8229 (0.0004) 0.1562 (0.0009) 0.0566 (0.0003) 0.1438 (0.0009)
Faux Leather 0.4582 (0.0006) 0.0261 (0.0026) 0.0576 (0.0009) 0.1287 (0.0026)
Iron 0.4977 (0.0005) -0.0021 (0.0048) 0.0414 (0.0011) 0.1140 (0.0034)
Metal 0.7994 (0.0005) 0.1754 (0.0007) 0.0461 (0.0003) 0.1389 (0.0010)
Metal & Upholst. 0.0275 (0.0002) 0.3080 (0.0033) 0.0619 (0.0044) 0.1560 (0.0125)
Solid Wood 0.8754 (0.0004) 0.0566 (0.0008) 0.0599 (0.0004) 0.1435 (0.0010)
Upholstered 0.8642 (0.0004) 0.1044 (0.0006) 0.0589 (0.0003) 0.1315 (0.0009)
Wood 0.7595 (0.0005) 0.1849 (0.0013) 0.0540 (0.0005) 0.1159 (0.0013)
Wood and Metal 0.6380 (0.0005) 0.1359 (0.0028) 0.0436 (0.0006) 0.1469 (0.0020)
Wood & Upholst. 0.0905 (0.0003) 0.1153 (0.0018) 0.0567 (0.0024) 0.1220 (0.0064)
Table 8: The correlation in observed attributes in the sets of searched and recommended items.
This table is based on three observed attributes: material, design, and available colors. In columns 1-4, we
regress an indicator that at least one item in positions 2-10 has a given attribute on the indicator that the
item in the first position has the same attribute. In columns 5-8, we consider all items in the personalized
rankings that have a given attribute, and we regress the searched indicator of the second such item on the
search indicator of the first (i.e., topmost) item with this attribute.
42

Attribute Attribute Correlation of attributes in clicks Correlation of attributes in rankings
Name Value Const. Std. Slope Std. Const. Std. Slope Std.
Est. Err. Est. Err. Est. Err. Est. Err.
Style American Trad. 0.3905 (0.0005) 0.1233 (0.0023) 0.0634 (0.0009) 0.1267 (0.0024)
Beachy 0.0555 (0.0002) 0.4338 (0.0044) 0.0480 (0.0017) 0.1225 (0.0054)
Bohemian 0.0497 (0.0002) 0.0884 (0.0019) 0.0615 (0.0045) 0.1353 (0.0109)
Bold Eclectic 0.8302 (0.0004) -0.0116 (0.0015) 0.0477 (0.0003) 0.0743 (0.0011)
Cabin Lodge 0.0408 (0.0002) 0.4336 (0.0030) 0.0627 (0.0032) 0.1446 (0.0087)
Coastal 0.2602 (0.0005) 0.3115 (0.0025) 0.0743 (0.0011) 0.0956 (0.0030)
Cottage American 0.1964 (0.0004) 0.0190 (0.0034) 0.0586 (0.0025) 0.1197 (0.0080)
Country 0.7382 (0.0005) 0.0633 (0.0018) 0.0489 (0.0005) 0.1185 (0.0015)
French Country 0.4559 (0.0005) -0.2546 (0.0059) 0.0247 (0.0014) 0.0606 (0.0059)
Glam 0.4359 (0.0006) 0.3332 (0.0020) 0.0707 (0.0007) 0.1563 (0.0018)
Global Inspired 0.0530 (0.0002) 0.0903 (0.0019) 0.0619 (0.0043) 0.1322 (0.0104)
Mid Century 0.0429 (0.0002) 0.3633 (0.0018) 0.0904 (0.0031) 0.1515 (0.0070)
Modern Contemp. 0.9809 (0.0002) 0.0146 (0.0003) 0.0674 (0.0003) 0.1089 (0.0009)
Farmhouse 0.1968 (0.0004) 0.2516 (0.0025) 0.0810 (0.0018) 0.1730 (0.0044)
Modern Rustic 0.0357 (0.0002) 0.2341 (0.0030) 0.0510 (0.0039) 0.1161 (0.0129)
Nautical 0.0220 (0.0002) 0.0488 (0.0055) 0.0728 (0.0125) 0.0324 (0.0374)
Ornate Glam 0.0827 (0.0003) 0.2523 (0.0039) 0.0637 (0.0033) 0.1394 (0.0093)
Ornate Trad. 0.0104 (0.0001) 0.5310 (0.0031) 0.0324 (0.0039) 0.1783 (0.0122)
Posh Luxe 0.2990 (0.0005) 0.3915 (0.0024) 0.0783 (0.0011) 0.1714 (0.0025)
Rustic 0.1371 (0.0004) 0.4676 (0.0020) 0.0829 (0.0015) 0.1510 (0.0036)
Scandinavian 0.0241 (0.0002) 0.2545 (0.0025) 0.0734 (0.0040) 0.0953 (0.0110)
Sleek Chic 0.7941 (0.0005) -0.0656 (0.0015) 0.0492 (0.0004) 0.1193 (0.0012)
Traditional 0.9692 (0.0003) -0.0044 (0.0004) 0.0629 (0.0003) 0.0672 (0.0008)
Wood Tone Dark Brown 0.5272 (0.0006) 0.1611 (0.0021) 0.0597 (0.0007) 0.1450 (0.0020)
Espresso 0.5273 (0.0006) 0.1611 (0.0021) 0.0597 (0.0007) 0.1450 (0.0020)
Gray 0.0972 (0.0003) 0.2509 (0.0025) 0.0600 (0.0017) 0.0769 (0.0047)
Light 0.1648 (0.0004) 0.3326 (0.0032) 0.0628 (0.0017) 0.0629 (0.0054)
Medium 0.6367 (0.0005) 0.1924 (0.0016) 0.0617 (0.0005) 0.1174 (0.0015)
Yellow 0.2961 (0.0005) 0.3670 (0.0025) 0.0742 (0.0010) 0.1149 (0.0028)
Red 0.0565 (0.0003) 0.2088 (0.0035) 0.0458 (0.0025) 0.1139 (0.0081)
Upholstery Cotton 0.0092 (0.0001) 0.1884 (0.0025) 0.0594 (0.0096) 0.0732 (0.0272)
Faux Leather 0.4584 (0.0006) 0.0265 (0.0026) 0.0575 (0.0009) 0.1284 (0.0026)
Linen 0.3038 (0.0005) 0.3711 (0.0027) 0.0906 (0.0012) 0.1619 (0.0027)
Polyester 0.8108 (0.0004) 0.1599 (0.0009) 0.0529 (0.0003) 0.1352 (0.0010)
Velvet 0.2681 (0.0005) 0.3182 (0.0028) 0.0839 (0.0015) 0.1550 (0.0035)
Wood Acacia 0.0105 (0.0001) 0.2036 (0.0027) 0.0576 (0.0114) 0.1057 (0.0286)
Mango 0.0140 (0.0001) 0.0372 (0.0056) 0.0373 (0.0205) 0.1710 (0.0526)
Pine 0.0987 (0.0003) 0.6019 (0.0018) 0.0700 (0.0015) 0.1163 (0.0036)
Poplar 0.0336 (0.0002) 0.2063 (0.0018) 0.0572 (0.0036) 0.1201 (0.0113)
Rubberwood 0.0789 (0.0003) 0.5988 (0.0027) 0.0683 (0.0014) 0.1450 (0.0041)
Table 9: The correlation in observed attributes in the sets of searched and recommended items.
This table is based on four observed attributes: style, upholstery material, wood tone, and wood type. In
columns 1-4, we regress an indicator that at least one item in positions 2-10 has a given attribute on the
indicator that the item in the first position has the same attribute. In columns 5-8, we consider all items in
the personalized rankings that have a given attribute, and we regress the search indicator of the second such
item on the search indicator of the first (i.e., topmost) item with this attribute.
43

Panel A. Items for which market shares decreased most under personalization
Panel B. Items for which market shares increased most under personalization
Figure 7: Examples of items that lose market shares (top panel) and gain market shares
(bottom panel) under the personalized ranking algorithm compared to the non-personalized
one.
44

C Estimation Details
Constructing alternative sets Bi . To compute the simulated one-vs-each bound in equation
(12), we need to sample alternative sets Bi for each user i from the universe of all possible search sets
Si . In theory, we could generate a sample of truly random search sets by drawing a binary variable
for each of 48 items displayed to the user. In practice, however, many search sets in such as sample
would be so unattractive that they would yield large negative net benefits miS 0 regardless of search
costs and taste parameters. As a result, the corresponding net benefit differences (miS − miS 0 )
in (12) would barely change as the estimator moves through the parameter space, thus leading to
numerical issues and large standard errors.
To address this issue, we select alternative sets Bi that are most informative about the structural
parameters of the model. We construct three types of alternative sets different from the actual set
Si selected by user i in the data. First, we construct “add one” sets by extending Si with one item
that was displayed but not searched. Second, we construct “remove one” sets by dropping one item
from Si . Finally, we construct “swap one” sets by swapping one item from Si for another item that
was displayed but not searched. The set Bi then comprises of all possible additions, subtractions,
and swaps obtained from the observed set Si . In practice, we found that sampling sets Bi in this
way makes the MLE estimator recover the true model’s parameters much better and increases
numerical stability, compared to sampling sets Bi completely randomly. It also makes computation
faster: since the number of possible additions, subtractions, and swaps is limited by the number
R = 48 of displayed items, the sample Bi rarely includes more than 100-200 sets. Moreover, these
sets have to be constructed only once before estimation, after which they can be called repeatedly
from the main estimation procedure.
Maximizing the likelihood. We estimate structural parameters ω and users’ types λi by max-
imizing the total log-likelihood across N users in the dataset, computing it as LogL(y, S, R) =
(1/N ) N
P
i=1 log Li (λi ; ω), where the individual log-likelihood log Li (λi ; ω) is defined in equation (9).
Given that we need to estimate latent factors ξj and user-specific tastes λi together with other
structural parameters, we have to deal with a large-scale estimation problem. In practice, how-
ever, the estimation of individual types λi can be efficiently parallelized across many GPU cores,
which makes updating these parameters for all N = 50, 000 users relatively quick. In addition,
because the log-likelihood function we maximize admits a simple closed-form solution, we are able
to further speed up the estimation by supplying the expressions for the first and second derivatives.
To avoid overfitting, we impose L2 regularization on individual types, thus shrinking them to the
population mean λ̄. When estimating the model, we tune the value of the shrinkage parameter in
this regularization by maximizing the out-of-sample validation metric defined below.
One practical consideration is how to choose the number of latent attributes KL . Allowing
for a flexible distribution of tastes is crucial for our application. While some flexibility helps, too
much flexibility can lead to overfitting. To understand why this issue may arise in our application,
consider a version of our model with a large number of latent attributes ξj . The more latent
45

attributes we introduce, the closer we get to the model that separately estimates the tastes of each
user i for each item j. In an overly flexible model, we could perfectly rationalize any observed set
of clicks with a model that predicts the user has extremely high utility for the items she clicked on,
and extremely low utility for the items she did not click on. A model that overfits in this manner
would make overly confident predictions, as it would imply that the observed outcome was the only
likely outcome. This prediction would poorly reflect the true tastes of this user, as the user might
have been equally likely to click on other items as well, which is ignored in the overfitted model.
The tight fit of the model can, in turn, make us overconfident about potential welfare gains from
personalized rankings. To avoid this misleading inference, we need a disciplined way to prevent
overfitting in our estimation.
To avoid overfitting, we vary the number of latent factors and examine how that affects the
out-of-sample predictions of the model. An important question is then what metric to use as a
relevant measure of out-of-sample fit. Using random sampling, we construct a training sample and
a test sample that include N = 50, 000 users each. Furthermore, we select 10% users in the training
sample to be “validation” users, and we withhold from the estimation one part of the likelihood
function log Li (λi ; ω) for each of these users. That is, we withhold the ranking likelihood log Pi (Ri ),
or search likelihood log Pi (Si |Ri ), or purchase likelihood log Pi (yi |Si ) from equation (9). Using this
validation sample, we study what happens when we estimate the model using incomplete data and
predict the user behavior that corresponds to the part of the likelihood not used in estimation. For
example, for some validation users we withhold the purchase likelihood, estimate their tastes from
observed personalized rankings and searches, and attempt to predict what these users purchase.
Similarly, for some other validation users we estimate their tastes λi from only search and purchase
data, and we then attempt to predict their personalized rankings. We aggregate all these out of
sample predictions by computing the average out-of-sample likelihood.
This metric of out-of-sample likelihood gives us a useful criterion for model selection. We select
the number of latent factors KL by monitoring the out-of-sample likelihood. We aim to select a
model with the level of flexibility that performs best at predicting out-of-sample search behavior of
individual users. In our application, we find that increasing the number of latent attributes until
5-6 substantially increases out-of-sample likelihood, whereas adding more attributes beyond that
point generates only marginal gains. In practice, since the complexity of estimation grows with the
number of latent factors, we estimate the model with dim(ξj ) = 2. All our main welfare results are
then based on the estimates from a model with two latent factors.
Decomposing welfare changes. In Section 4.3, we compute how personalized rankings affect
the expected consumer surplus CS. We compute ex-ante consumer surplus using the formula in
(13). We approximate the first summation in (13) by drawing NR = 10 rankings for each user
from the appropriate ranking model (i.e., from the appropriate distribution of item rankings Ri ).
To approximate the second summation, we randomly simulate feasible search sets Si using the
following algorithm. If the estimated model fits well, most users will be predicted to search no
46

more than 1-3 items. For this reason, we let users choose among all feasible search sets of Si of
size 1-3 by generating a list of all C148 sets of size one, C248 sets of size two, and C348 sets of size
three. We then additionally draw several search sets Si of larger size; to this end, we use a uniform
distribution to draw 1000 search sets of size four, five, and so on until ten. Since the number of
possible sets grows quickly with the set size, we are not able to enumerate all possible search sets of
size four and larger. However, because users in the estimated model almost never find it optimal to
search more than three items, most of these larger search sets have negligible probabilities Pi (Si |Ri )
in equation (13). We can therefore omit most of these sets from computation virtually without any
loss of approximation quality.
We further decompose this change in consumer surplus into the changes in the (a) total search
costs, (b) purchase probability, (c) expected utility conditional on making a purchase. Specifically,
we decompose the consumer surplus change as:
∆CS = CSpers − CSuni

= (Cpers − Cuni ) + Euni · (Ppers − Puni ) + Ppers · (Epers − Euni ) (14)
| {z } | {z } | {z }
search costs purchase probability match value
where Calgo is the expected total search cost paid during the search process, Palgo is the ex-
pected purchase probability, Ealgo is the expected utility conditional on the purchase, and algo ∈
{pers, uni} captures the current ranking algorithm (personalized or uniform). The first part of the
decomposition, labeled search costs, captures to what extent personalization induces more active
search, thus making users burn more utility on search costs. The second part, labeled purchase
probability, captures whether personalized rankings make users more likely to make a purchase.
Finally, the third part, labeled match value, captures to what extent some users find items that
better match their individual tastes, while retaining their buyer status. We report the results of
this decomposition in Table 5 of Section 4.3.
47

D Model Fit and Additional Estimates
The model we estimate in Section 4 performs well at predicting the aggregate moments in the test
sample. Recall that we use two samples: a training sample of 50,000 users in the personalized
group, and a test sample of 50,000 users who were not included in estimation but who we randomly
drew from the personalized group. We first estimate the model using the training sample, and we
then predict the out-of-sample behavior of users in the test sample. Table (10) shows the results.
The table illustrates that the model performs well at predicting the (a) click rates by position, (b)
attributes of searched and purchased items, and (c) average search intensity for users with and
without purchases. Because we estimate users to have an attractive outside option, the estimated
model predicts a purchase rate of only about 3.4%, somewhat lower than the purchase rate 4.2%
observed in the test sample.
Test Sample (N = 50, 000)

Moment
Simulated Data
Avg. attributes of searched items:
Price 2.111 2.328
Size: Twin 0.753 0.711
Size: Queen 0.924 0.916
Size: King 0.858 0.827
Material: Wood 0.126 0.154
Material: Metal 0.337 0.273
Material: Leather 0.051 0.071
Material: Fabric 0.417 0.416
Style: American 0.09 0.095
Style: Bold 0.099 0.086
Style: Farmhouse 0.128 0.135
Style: Glam 0.093 0.121
Style: Comtemp. 0.410 0.428
Style: Posh 0.066 0.089
Style: Rustic 0.042 0.056
Style: Sleek 0.071 0.064
Style: Traditional 0.478 0.458
Style: Eclectic 0.862 0.894
Style: Scandinavian 0.163 0.159
Other moments:
Purchase probability 0.034 0.042
Outside option share 0.966 0.957
Avg. number of searches 1.907 2.249
Table 10: Model fit. The table compares the moments predicted by the estimated model to those observed
in the test sample with N = 50, 000 users whose data was not used in estimation.
48

49

Figure 8: Distributions of estimated taste parameters αi and βi from the full model with searches and rankings.

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Welfare Effects of Personalized Rankings

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Welfare Effects of Personalized Rankings*

Robert Donnelly Ayush Kanodia Ilya Morozov

January 21, 2022

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2 Personalized Rankings on Wayfair.com

2.1 Field Experiment

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2.2 The Effects of Personalized Rankings

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2.3 Does Personalization Benefit Users? A Stylized Example

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3 Estimating Welfare Effects of Personalized Rankings

uij = −αi pj,t(i) + x0j βi + ξj0 θi +εij (1)

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3.2 Model of Rankings

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vij = w̃u δij + w̃π πij + µpij if i ∈ P ersonalized (7)

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3.3 Maximum Likelihood Estimation

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Computing this summation is computationally burdensome, so we need to approximate it. However,

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4.1 Position Effects

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4.2 Retailer’s Incentives

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4.3 Welfare Effects of Personalized Rankings

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4.4 Discussion of Results

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