1. Introduction
Mobile technologies are changing the way firms do business [
1,
2]. Location-based services (LBSs), i.e., GPS-authorized smartphones that reveal the phone users’ locations, allow marketers to target customers by their locations [
3]. From the consumers’ points of view, mobile devices with LBSs have two major advantages, namely time and space flexibility, over the conventional desktop computer [
4]. In other words, consumers can seek and buy their desired products from mobile stores anytime and anywhere, both of which are independently and mutually constrained by traditional bricks-and-mortar channels [
5]. Luo et al. [
6] showed that consumers’ purchase aspirations increased when they receive promotional offers close to the time and place of the promotional campaign. Hence, combining geographical and temporal targeting is a potent strategy for companies to engage customers at the right moment and in the right location, which can stimulate consumer responses [
7] and increase purchases [
6].
Recent advances in LBSs provide businesses with a new marketing channel for mobile promotion [
8]. Mobile promotion enables direct communication with target consumers with individualized information anytime and anyplace [
9]. As an emerging approach, mobile coupons marketers are playing an increasingly important role in mobile promotion activities. Mobile coupons are digital coupons that companies send to consumers as promotional offers, commonly in the form of short message services (SMSs), applications (APPs), mobile websites, or emails [
10,
11]. The overwhelming majority of early mobile promotion forms are SMSs [
12,
13]. Consumers can save these coupons in their mobile devices and redeem them later at the point of sales. In 2019, 65% of respondents said receiving mobile coupons they can redeem in-store is important when shop** in physical stores. Additionally, 69% said receiving a personalized offer on their phone that they can use in-store would make them more likely to visit a physical retail location [
14].
Apparently, coupons facilitate price discrimination and engender market segmentation that firms deploy to compete for price-sensitive consumers, be they paper or electronic in nature. However, the traditional coupons cannot target consumers’ locations and usage behaviors (firms can use demographic information [
15] and panel data on household purchase behavior [
16] to target different consumers); traditional coupons have higher printing and distribution costs as compared with e-coupons (however, non-targeting e-coupons merely reduce cost but cannot improve targeting efficiency). As a form of the third degree of price discrimination [
17], mobile coupons endow firms with the capability to target different prices to different consumers based on consumer location information and behavioral information at a lower distribution cost and a higher targeting efficiency.
In this study we focus on location-based mobile coupon (LBMC) promotion, which constitutes a promising customer acquisition tool because offers in close vicinity of points of sale have potentially high relevance for consumers, i.e., geo-fencing. Instead of putting up a geo-fence around a store’s own location to trigger mobile offers or discounts, a retailer or brand will geo-fence the locations outside of the firm’s primary turf or even the locations of nearby rivals to pull in consumers, which is known as “geo-conquesting”, i.e., “
mobile coupons target consumers with geo-fencing” [
18].
Theoretical studies of competitive bilateral targeted promotion and mobile coupons are surprisingly limited in prior research. Chen et al. [
19] studied competitive mobile targeting based on consumers’ real-time locations and concluded that a firm’s profit could be higher under mobile targeting than under uniform pricing. This conclusion is, to some extent, in line with our finding that a firm that adopts LBMC promotion obtains a higher profit. Endeavoring to fill these research gaps, we address several issues concerning strategies for LBMC promotion in the context of two competing retailers. Specifically, we seek to address the following questions:
- (1)
How should the competing retailers adopt targeted LBMC promotion?
- (2)
How is the equilibrium strategy for LBMC promotion influenced by the competition intensity of the retailers and by the retailers’ capabilities to target customers?
We answer these questions by develo** a model of two competing retailers in which each retailer can send mobile coupons via mobile targeting technologies to areas in the residual market where the consumers have non-positive utilities to compensate for the disutility of spatial cost and attract the consumers beyond the retailer’s market. We focus on analyzing a duopoly model in which the two competing retailers, first, choose whether to target consumers via mobile coupons, and then compete for consumers by simultaneously choosing their retail prices and the face values of their mobile coupons. Thus, our study entails endogenous mobile coupon decisions and pricing strategies in the context of LBMC promotion. We also extend the model to study the impact of product quality differentiation on the strategies for LBMC promotion.
We make three contributions to the literature on targeted LBMC promotion. First, we demonstrate that mobile coupons are an effective marketing tool to induce more location-conscious consumers by compensating consumers who are far away from the retailer’s market. Second, we derive the conditions under which retailers should adopt LBMC promotion under different market competition intensities and at different targeting costs. We find that under different competition intensities, only no adoption and symmetric adoption of LBMC promotion are the possible equilibria for the competing retailers. Finally, we analyze the retailers’ strategies for LBMC promotion competing under asymmetric quality. Interestingly, unlike the case of symmetric quality, we find that mixed strategies for LBMC promotion emerge despite the fact that the retailer with superior quality always makes a higher or the same profit as compared with that of the retailer with inferior quality.
We organize the remainder of this paper as follows: In
Section 2, we present a brief review of the related literature; in
Section 3, we introduce the oligopoly and duopoly models as the basic tools for analysis; in
Section 4, we derive the equilibrium strategies; in
Section 5, we extend the model to consider quality differentiation; in
Section 6, we conclude the paper, discuss the managerial implications of the research results, and suggest topics for future research.
4. Equilibrium Analysis
4.1. The Benchmarking Case: The Monopoly Model
We assume that a single firm (retailer) only occupies a part of the market, and it can push mobile coupons via mobile targeting technologies to areas in the residual market where consumers have non-positive utilities to compensate for the disutility of their temporal and spatial costs and lure the consumers in the competitor’s area.
The consumers are distributed uniformly along a Hoteling linear city, where the firm is located at the left end of a unit line. The firm is to maximize its revenue, i.e., px. Thus, we obtain , which is the indifferent point of the consumers. It is easy to derive that , , , and .
Now the firm sends mobile coupons to target consumers on the right side of the indifferent point, i.e.,
. Each consumer in this area receives a mobile coupon with a face value
m and will buy the product offered by the firm if he/she obtains a positive utility (see
Figure 2).
Lemma 1. In a monopoly market, the firm adopts LBMC promotion when the marginal targeting cost of mobile coupons satisfiesand, i.e., the whole market is not fully covered. As a result, the total demand increases, while the non-targeted segment (the non-targeted segment is the area in which the retailer does not send mobile coupons to consumers) shrinks and the non-targeted consumers are charged a higher price. (Proof in Supplementary Materials). Lemma 1 reveals intuitively that the firm can target different prices to different consumers with mobile coupons based on consumer locations. Consumers in the non-targeted segment are charged a higher price and those in the targeted segment are compensated for their long-distance locations. As a result, the total sale increases in the form of the third degree of price discrimination. In other words, in the “blue ocean” market, the firm gains a larger market share and a higher profit. This result is consistent with existing theoretical models relating to when a firm should charge its old customers more than new customers. Shin and Sudhir [
26] showed that when heterogeneity in purchase quantity and preference stochasticity are both low, it is optimal to reward the competitor’s customers; however, the behavior-based pricing is less profitable in their models while LBMC promotion is more profitable in ours. This might be explained by the fact that firms can take advantage of the asymmetry of location information to price discriminate across different geographies.
4.2. Subgame (NC, NC) in the Duopoly Model
Consider the game (
NC,
NC), i.e., no firms use mobile coupons to target consumers. It is well known that the equilibrium outcomes in a horizontal differentiation model such as ours depend on the value of
. The ratio
represents the cost-adjusted willingness of consumers to pay, much in the spirit of the notions of preference-adjusted valuation in Jerath et al. [
61] and valuation-adjusted preference in Joshi et al. [
62]. If
is low, the degree of competition in the market is low and the firms act as local monopolies. As
increases, the market covered increases until the firms begin to compete.
On the one hand, when is high, i.e., , consumers have a relatively low switching cost, making the market inherently more competitive. Let denote the location of the consumer’s indifferent point between buying from Firm 1 and Firm 2, i.e., , which yields , and the firm profits are and . In equilibrium, the market is fully covered, and the optimal prices are . The demand and profit of each firm is and , respectively. The consumer’s indifferent point between buying from the two firms is at the center of the market and the consumers obtain a positive surplus.
On the other hand, when is low, i.e., , consumers have a relatively high switching cost, making the market inherently less competitive. The market is not fully covered, and the equilibrium corresponds to the location of the consumer’s indifferent point between purchasing firm i’s product or not, i.e., . Thus, the equilibrium prices and demands are and , respectively, so each firm’s profit is .
Finally, the intermediate values of
, i.e.,
, represent that the market is moderately competitive. In this case, there exist multiple price equilibria. Each of these equilibria corresponds to the location of a consumer’s indifferent point between purchasing either firm’s product
. Since the firms are
a priori symmetric in the market, first, we focus only on the symmetric equilibrium (this is analogous to the focal point refinement [
63], which is the most natural choice given the shared understanding of the environment by both firms) [
62,
64] such that the consumer’s indifferent point between buying from either firm is
. For each
, the equilibrium prices are
and
, the equilibrium demands are
and
, and the equilibrium profits are
and
for Firm 1 and Firm 2, respectively. Given the assumption, in this case, the equilibrium prices are
and the equilibrium demands are
, so the equilibrium profit of each firm is
.
Table 2 summarizes the equilibria of subgame (
NC,
NC).
4.3. Subgames (C, NC) and (NC, C) in the Duopoly Model
In the subgame (C, NC) or (NC, C), only one firm uses mobile coupons to target consumers.
- (1)
When the degree of competition is high (see
Figure 3)
The market is fully covered, and we obtain
,
, and
. Hence, the firms will maximize their profits as Equation (3):
For and , in equilibrium, , , and . The total demands of the firms are and , and the size of the targeted segment is . The equilibrium profits of the firms are and .
- (2)
When the degree of competition is low (see
Figure 4)
The whole market is not fully covered, and the firms will maximize
where
. For
and
, the equilibrium outcomes are
,
, and
. The total demands of the firms are
and
, and the size of the targeted segment
is
. The equilibrium profits of the firms are
and
.
- (3)
When the degree of competition is moderate (see
Figure 5)
As in
Section 4.2, for
and
, the consumer’s indifferent point between buying from either firm is
. The equilibrium outcomes are
,
, and
. The total demands of the firms are
and the size of the targeted segment
is
. The equilibrium profits of the firms are
and
.
Table 3 summarizes the equilibria of subgame (
C,
NC).
Lemma 2. In the asymmetric subgame (C, NC) or (NC, C), the firm that adopts LBMC promotion is always better off, while the other firm is no better off. Moreover, when the degree of competition of the market is relatively high, i.e.,, the other firm is worse off. (Proof in Supplementary Materials). Lemma 2 reveals that both firms have incentives to adopt LBMC promotion to obtain higher profits. The non-adopter is not affected when the competition intensity is not high; but it is not the case when the competition intensity is relatively high. Thus, the subgames (NC, C) and (C, NC) do not have stable equilibria.
Corollary 1. Unilateral adoption of LBMC promotion intensifies the competition in the market. (Proof in Supplementary Materials). 4.4. Subgame (C, C) in the Duopoly Model
- (1)
When the competition degree is high
The market is fully covered, and we have
,
, and
. The firms will maximize their profits are in Equation (5):
In equilibrium, the targeted area is zero, which implies that both firms choose not to use mobile coupons to target consumers.
- (2)
When the degree of competition is low
The whole market is not fully covered, and the firms’ profits are in Equation (6):
where
. For
and
, the equilibrium outcomes are
and
. The total demands of the firms are
and the size of the targeted segment
is
. The equilibrium profit of each firm is
.
- (3)
When the competition degree is moderate
Since both firms choose not to adopt LBMC promotion, if is relatively high, the equilibrium corresponds to the location of the consumer’s indifferent point between purchasing either firm’s product . For , the equilibrium outcomes are and , so the equilibrium profit of each firm is .
Table 4 summarizes the equilibria of subgame (
C,
C).
Lemma 3. In the symmetric subgame (C, C), both firms are better off as compared with the subgame when no firm adopts LBMC promotion, i.e., subgame (NC, NC). In addition, both subgames (NC, C) and (C, NC) have no stable equilibria and will deviate from subgame (C, C) ultimately. (Proof in Supplementary Materials). 4.5. LBMC Promotion in the Duopoly Market
Comparing the profits among the various subgames, we obtain after tedious derivations the SPNE as follows:
Proposition 1. In the competitive duopoly market, there is a unique SPNE at which both firms adopt LBMC promotion under all the scenarios if the conditions in Table 5 are satisfied. Otherwise, no firm adopts LBMC promotion in the rest of the region. (Proof in Supplementary Materials). We apply to partition the market under different competition intensities to derive the cost conditions for adopting LBMC promotion in equilibrium. Evidently, Proposition 1 implies that the marginal cost of using mobile coupons is a crucial determinant for firms to adopt LBMC promotion, i.e., only when the marginal targeting cost is below the threshold. If the marginal targeting cost exceeds the threshold, both firms will not adopt LBMC promotion. Changes in consumer’s willingness to pay and travel cost have different impacts on the marginal cost. For instance, when , the threshold of the marginal cost remains constant as the travel cost changes. When , the threshold of the marginal cost remains constant as consumer’s willingness to pay V changes. When , consumer’s willingness to pay and travel cost have joint effects on the threshold of the marginal cost . These results provide useful insights about the marginal targeting cost of mobile coupons. As stated above, if the marginal targeting cost of mobile coupons exceeds a threshold, no firm chooses LBMC promotion. This implies that coupon publishers should strengthen their R&D on location-based services to lower the targeting cost, which draws more firms to adopt LBMC promotion. Therefore, this will result in a win-win situation (it implies that both firms are better off as compared with no couponing) for both coupon publishers and retailers.
Proposition 1 provides important managerial implications for marketing practitioners seeking to formulate effective strategies for targeted LBMC promotion. It indicates that mobile coupons are an effective means for retailers to enhance their power to entice consumers. It is important to realize that contemporary retailing is increasingly becoming LBS oriented that makes use of the bricks-and-mortar and mobile channels. Brick-and-mortar retailers should employ new tools to attract more consumers in the omni-channel era. As a new promotion tool, LBMCs have the advantages of segmenting consumers based on their real-time locations and generating more consumer traffic to retail stores. Brick-and-mortar retailers should opt for the proper strategy for adopting LBMC promotion.
Our findings shed light on a retailer’s decisions on the adoption of LBMC promotion in a competitive market. The adoption of LBMC promotion can yield a competitive edge to a retailer over a conventional firm because the adopter firm has a greater market reach (when the degree of competition is low) and is able to cater to consumers in different locations. It captures the consumer surplus with geographical privilege (i.e., consumers in the vicinity of a physical store), which compensates consumers in a faraway place with the third degree of price discrimination. Hence, a single firm can benefit from adopting targeted LBMC promotion, while the competing firm also has the incentive to adopt mobile coupons. For LBMC, asymmetric adoption does not exist if the marginal targeting cost is low enough and the optimal equilibrium results in win-win outcomes. In the presence of a competitor, the retailer should adopt LBMC promotion if the marginal targeting cost is low enough.
5. Extension
In this section, we extend our model by considering the competing firms may differ in the quality of their products. Specifically, consumers are heterogeneous in their willingness to pay for the goods of different quality. We assume that the reservation value for the product from firm
i is
Vi, which depends on the product quality of the firm [
65]. Without loss of generality, let Firm 1 be the superior-quality firm with its product quality normalized to one, i.e.,
. Firm 2 is the inferior-quality firm with the quality of its product
, i.e.,
. Consumer
l’s utility from buying the product from firm
i without mobile coupons is in Equation (7):
Consumer
l’s utility from buying the product from firm
i with mobile coupons is in Equation (8):
Similar to the analysis in
Section 4, we can derive the equilibrium results of the four subgames (
NC,
NC), (
C,
NC), (
NC,
C), and (
C,
C) under the condition of quality differentiation (see
Table 6,
Table 7,
Table 8 and
Table 9).
We performed numerical studies to illustrate firms’ choices of strategies for LCMC promotion with quality differentiation by comparing their equilibrium profits among the subgames under different market competition intensities. We make the following observations from the numerical studies:
- (1)
In a market with a high degree of competition, i.e.,
, and the marginal targeting cost is
, we assume
,
, and
(for the plots, the values of the parameters
V and
t follow those used in [
61], and the marginal targeting cost
c is determined by
V or
t), and classify Firm 2′s quality level as low (
), medium (
), and high (
). We show the results in
Figure 6.
If quality differentiation is low, i.e.,
q is high, both firms adopt LBMC promotion, which is similar to the conclusions in
Section 4. However, the results change when quality differentiation increases. If quality differentiation is medium, there is a mixed Nash equilibrium at which the inferior-quality firm does not adopt LBMC promotion. With quality differentiation further increasing to a high level, no firm adopts LBMC promotion eventually. In reality, if quality differentiation is high, the firm with superior product quality will exploit its quality advantage to compete for consumers and will not adopt LBMC promotion. Its quality advantage is enough for it to compete with rivals with inferior product quality. For instance, in the fast-food industry (Domino’s, Pizza Hut, and Burger King) LBS technology is applied to locate smartphone users and targeted to reach potential customers who are near their stores.
- (2)
In a market with a medium degree of competition, i.e.,
, and the marginal targeting cost is
, we assume
,
, and
, and classify Firm 2′s quality level as low (
), medium (
), and high (
). We show the results in
Figure 7.
When quality differentiation is low or high, i.e., , the adoption of LBMC promotion is always an optimal strategy for both firms. When quality differentiation is medium, the superior-quality firm’s choice remains unchanged while the inferior-quality firm’s optimal choice changes to not adopting LBMC promotion if the marginal targeting cost is relatively high, i.e., .
- (3)
In a market with a low degree of competition, i.e.,
, and the marginal targeting cost is
, we assume
,
, and
, and classify Firm 2′s quality level as low (
), medium (
), and high (
). We show the results in
Figure 8.
Under this scenario, quality differentiation has no impact on firms’ choices of strategies and the adoption of LBMC promotion is always the optimal strategy for both firms because their markets are independent of each other. This result is in line with the findings in Proposition 1.
In summary, quality differentiation has a significant impact on the optimal strategy choice of the inferior-quality firm, while the superior-quality firm’s choice of strategy changes only when quality differentiation is very high under a high degree of competition. In Proposition 1, firms have only symmetric optimal pure strategies (i.e., no adoption and symmetric adoption) as long as the marginal targeting cost of mobile coupons c satisfies certain conditions. However, mixed strategies for LBMC promotion emerge when firms’ products have different quality. For instance, when quality differentiation is moderate and the degree of market competition is medium or high, the pure strategy does not exist.
Corollary 2. The superior-quality firm that has the quality advantage always makes a higher (or the same) profit in competing with the inferior-quality firm under the scenario of symmetric adoption or no adoption of LBMC promotion.
Furthermore, comparing the equilibrium profits of the firms under the scenario of symmetric adoption or no adoption of LBMC promotion, we find that the superior-quality firm’s equilibrium profit is higher than those under all other scenarios. It is evident that the superior-quality firm has the quality advantage when both firms adopt LBMC promotion. As the whole market becomes saturated, i.e., the degree of competition is medium or even high, LBMC promotion cannot attract more consumers. Thus, when both firms incur the same level of marketing expenses, the superior-quality firm achieves better results due to higher consumer valuations for purchasing the higher quality product that it sells.
As we know that, under symmetric competition, a retailer should adopt LBMC promotion as long as the marginal targeting cost is low enough. However, this is no longer the case in the asymmetric competition environment. If quality differentiation is extremely low or high, adopting LBMC promotion is the optimal strategy (except under the scenario of high competition and high-quality differentiation, in which case no adoption of LBMC promotion is the optimal strategy). When quality differentiation is medium, firms’ profits are determined by the degree of competition, quality differentiation, and marginal targeting cost of mobile coupons, in which case mixed strategies exist. What counts for the superior-quality firm is that with its quality advantage, it always makes a higher profit from competing with LBMC promotion.