Should an Ad Agency Offer Geoconquesting or Protection from It?

The recent years have witnessed a tremendous increase in Internet advertising, especially location-based advertising on mobile devices. At the same time, search-driven and display advertising on more traditional media such as personal computers continues to be strong. This study examines the interaction between top-of-funnel advertising (e.g., search or display advertising) and bottom-of-funnel advertising (e.g., using a mobile application on a smart phone). We are particularly interested in the phenomenon of geoconquesting: the bottom-of-funnel advertising efforts of a firm to poach (or lure away) customers that have come to a competing firm’s physical store as a result of top-of-funnel advertising efforts by the firm. Geoconquesting efforts by a competing firm should reduce a focal firm’s incentive to invest in top-of-funnel efforts. Thus, a key challenge for an agent like Google that provides both top-of-funnel and bottom-of-funnel advertising services is to balance the inherent conflict between the two to maximize the total revenue collected from the two forms of advertising. We develop a game-theoretic model for this phenomenon. The model is from the perspective of an advertising agent that wishes to maximize the revenue earned from both kinds of advertising services, under the absence or the presence of an outside option that can be used by advertisers to obtain geoconquesting services. A key result is that sometimes the agent benefits from not offering geoconquesting, but instead promises, after collecting a fee, to protect the advertisers from poaching on each other’s search traffic. Interestingly, such a protection service becomes more lucrative for the agent when a cheaper outside option for geoconquesting is available to the advertisers.