Geo-Fencing or Geo-Conquesting? a strategic analysis of Location-Based coupon under different market structures

Abstract

Location-based technology enables firms to target consumers with personalized coupons based on their real-time locations, making location-based coupons (LBC) an innovative marketing tool. In this paper, we consider two types of LBC strategies, namely defensive geo-fencing versus offensive geo-conquesting. With a defensive LBC strategy, a company sets a virtual geo-fence by offering coupons with deeper discounts to consumers located closer to the focal firm. Using a spatial model, we examine how two competing companies choose between defensive and offensive LBC strategies, as well as the impact of LBC strategies on company profits, consumer surplus, and social welfare. The results show that the defensive LBC strategy lowers revenue in a monopoly market but increases it under duopoly conditions. In a duopoly market, both firms adopting the defensive LBC strategy is the Nash equilibrium outcome, leading to the highest profits but lowest consumer surplus. The misalignment of interests among firms and consumers requires policymakers to regulate firms’ LBC strategies for the sake of customers.