Catch Me if You Can! The Economic Analysis of Geofencing

Advertising, one of the critical marketing devices, directly affects sales performance. Companies have been long seeking efficient advertising strategies to promote consumer awareness and boost the following sales. With the advent of location-based services, geofencing enables an advertiser to set a fencing zone around its establishment virtually and entice targeted consumers to visit it physically. Yet, when to adopt and how to optimize geofencing remain unclear, despite its emergence across industries. We investigate the optimal geofencing using a game-theoretic model, highlighting the relationship between consumer awareness and geofencing configurations. We consider a Hotelling city where consumers are heterogeneous in both locations and awareness (i.e., informed or uninformed). We first compare geofencing and traditional advertising under location-independent awareness (i.e., informed consumers are uniformly distributed along the city). We show that geofencing outperforms the alternative for three reasons, namely, market expansion, profit-margin enhancement, and cost savings. We then obtain the optimal fencing radius and price under various market conditions, from which we identify a positive radius-price relationship overlooked in the literature. We further extend our location-independent awareness model to a location-dependent one, where consumer awareness level varies by location. The findings showcase the significant impact of the awareness distribution on the applicability and profitability of geofencing. Last, to improve geofencing efficiency, we propose a novel strategy (i.e., flexible geofencing) that encourages an advertiser to flexibly choose other locations as the point of interest, rather than its store only. The analytics demonstrate the superiority of flexible geofencing over the typical proximity-based practice. Such a flexible strategy improves the advertiser’s profits, consumer surplus, and social welfare. In sum, we voyage in the ocean of advertising, sail our research to the uncharted treasure island of geofencing, and map a course to take new adventures for future research and practices.