Competitive Price Targeting with Smartphone Coupons
Jean-Pierre Dubé, Zheng Fang, Nathan Fong, and Xueming Luo, 2016, 16-103
- Competition moderates effectiveness of price targeting
- Firms can easily mis-estimate profitability of targeting (overestimate geographic; underestimate behavioral)
This study examines the likely profitability of geo-conquesting, a popular new marketing strategy that deliberately targets promotional offers to customers located near a competitor. Recent practitioner experience suggests that a firm can successfully poach its competitors’ customers in this manner, generating incremental leads and revenues. However, the typical evidence consists of unilateral testing by one firm, holding its rivals’ actions fixed. In practice, the permanent implementation of a customer-poaching strategy like geo-conquesting would likely elicit a competitor response.
Jean-Pierre Dubé, Zheng Fang, Nathan Fong, and Xueming Luo conduct a large-scale field experiment to study competitive price targeting in a duopoly market with two rival movie theaters, each located in a different shopping mall. The firms use mobile targeting to offer different prices based on a prospective customer’s geographic location and past purchase activity (i.e., recency). The authors simultaneously test a range of ticket prices from both firms to trace out their respective best responses to one another’s prices and to assess equilibrium outcomes.
They find an empirically large return on investment when a single firm unilaterally targets its prices based on the geographic location or historical visit behavior of a mobile customer. Consistent with recent practitioner experience, geographic targeting seems to have higher returns than behavioral targeting.
However, these returns can be mitigated by competitive interactions whereby both firms simultaneously engage in targeting. In their experiment, the response rates of mobile coupons for local customers were relatively immune to a competitor’s discounts. However, geo-conquesting—targeting mobile coupons to a competitor’s local customers—was considerably less effective when the rival also offered mobile discounts. In the equilibrium setting where both firms engaged in targeting, the returns to geographic targeting were much lower. In contrast, the returns to behavioral targeting improved. This moderating effect of competition is consistent with the recent theoretical literature on competitive price discrimination.
Thus, managers need to consider how competition moderates the profitability of price targeting. Moreover, field experiments that hold the competitor's actions fixed may generate misleading conclusions if the permanent implementation of a tested action would likely elicit a competitive response.
Jean-Pierre H. Dubé is Sigmund E. Edelstone Professor of Marketing, Booth School of Business, University of Chicago, Zheng Fang is Professor, School of Business, Sichuan University. Nathan Fong is Assistant Professor of Marketing and Xueming Luo is Professor and Charles Gilliland Chair in Marketing, both at the Fox School of Business, Temple University.
We would like to thank Eric Bradlow, Xiao Liu, Raji Srinivasan, K. Sudhir and Chunhua Wu for comments. We would also like to thank attendees of the 2015 Marketing Science Conference, MIT CODE Conference, and the NYU Big Data Conference, and workshop participants at the Global Center for Big Data in Mobile Analytics, the University of Louisville, and the University of California, San Diego for their insightful comments. We are grateful for the cooperation of our mobile service provider with the implementation of our field experiment.
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