Catch Me If You Can! The Economic Analysis of Geofencing

Geofencing, with the advent of location-based services, enables an advertiser to set a virtual fencing zone around its establishment and inform consumers within the zone to visit it. Yet, when to adopt and how to optimize geofencing remains unclear, despite its popularity across industries. We investigate the optimal geofencing using a game-theoretic model, highlighting the importance of initial consumer awareness in geofencing configurations. We consider an advertiser whose consumers are heterogeneous in location (i.e., local or remote) and awareness level. We first compare geofencing and mass advertising under location-independent awareness (i.e., the ratio of informed and uninformed consumers is consistent in both locations). We show that geofencing outperforms mass advertising as the advertiser focuses on the local market. Two benefits support the advertiser’s localization, namely, profit-margin enhancement and cost savings. We then obtain the optimal fencing radius and price under various market conditions with respect to product valuation and initial awareness. We further extend our location-independent awareness model to a location-dependent awareness, wherein the initial awareness level is negatively associated with the distance to the advertiser. The findings showcase the significant impact of the awareness distribution on the applicability and profitability of geofencing, which is underexplored in the literature. Last, to improve the efficiency of geofencing, we propose flexible geofencing that encourages the advertiser to flexibly choose the point of interest, not always staying with its store location. Our analytics detail the superiority of flexible geofencing over the typical proximity-based practice in the scenario of location-dependent awareness. Such a flexible strategy simultaneously 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.