Competitive Price Targeting with Smartphone Coupons1

With the cooperation of a large mobile service provider, we conduct a novel field experiment that simultaneously randomizes the prices of two competing movie theaters using mobile coupons. Unlike studies that only vary one firm’s prices, our experiment allows us to account for competitor response. We test mobile targeting based on consumers’ real-time and historic locations, allowing us to evaluate popular mobile coupon strategies in a competitive market. The experiment reveals substantial profit gains from mobile discounts during an off-peak period. 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. We combine our experimentally-generated data with a demand model to analyze optimal pricing in a static Bertrand-Nash equilibrium. Interestingly, competitive responses raise the profitability of behavioral targeting where symmetric pricing incentives soften price competition. In contrast, competitive responses lower the profitability of geographic targeting, where asymmetric pricing incentives toughen price competition. If we endogenize targeting choice, both firms would choose behavioral targeting in equilibrium, even though more granular geo-behavioral targeting combining both real-time and historic location was possible. These findings demonstrate the importance of considering competitor response when piloting novel price-targeting mechanisms.