Competitive Price Targeting with Smartphone Coupons

Abstract

To investigate the potential returns of targeted mobile discounts, we design and implement a large-scale field experiment involving two competing movie theaters. In the experiment, we test different forms of targeting based on real-time consumer location and past consumer behavior. A novel feature of our experiment is that we test a range of relative ticket prices from both firms to assess their targeting incentives and the moderating effects of competitive targeting. The experiment reveals substantial profit gains from mobile discounts during an off-peak period of the day. In particular, both firms could create incremental profits by targeting their competitor's location. However, the returns to such “geo-conquesting” are reduced when the competitor also launches its own targeting campaign.

To study optimal targeting incentives, we combine our experiment with a model of demand that can be used to predict the consumer choices at price levels that were not included on the experimental grid. We find that each firm would anticipate large gains from real-time mobile targeting. However, the realized gains would be much lower than anticipated if the rival simultaneously ran its own campaign. To approximate the likely longer-term outcomes, we conduct an equilibrium analysis of the firms' targeting incentives. Interestingly, competition enhances the returns to behavioral targeting but reduces the returns to geo-targeting. Under geo-targeting, each theater offers a discount in the rival's local market, toughening price competition. In contrast, under behavioral targeting, the strategic complementarity of prices coupled with the symmetric incentives of the two theaters to raise prices charged to high-recency consumers softens price competition. If we endogenize targeting choice, we find that both firms would choose behavioral targeting in equilibrium, even though a more granular geo-behavioral targeting based on both real-time location and past behavior was possible.

Our findings indicate that managers need to consider how competition moderates the profitability of price targeting. Moreover, field experiments in which the competitor's actions remain fixed may generate misleading conclusions if the implementation of tested actions would likely elicit a competitive response.

Keywords: competitive price discrimination, mobile marketing, targeting, field experiment, geo-conquesting, geo-fence

JEL Classification: M30, D43, C93