Coupon Targeting Competition in Privacy Sensitive Market

The problem of coupon targeting competition between two retailers who sell the same product in a privacy sensitive market is considered. In particular, consumers purchasing decisions are influenced by product prices as well as prior privacy violations by retailers. A Hotelling line model is utilized to investigate the coupon targeting competition between the retailers. Within this framework, privacy sensitivity is modeled using a Markov chain, wherein consumers switch back and forth probabilistically between a privacy alerted state and privacy non-alerted state depending on whether or not they receive targeted coupons from a retailer. The competition between these two retailers at each segment of Hotelling line is modeled by a stochastic nonzero-sum game. In every segment of the Hotelling line, stationary equilibrium strategies of retailers that provide optimal discounted return over an infinite horizon is studied. It is demonstrated that in contrast to a price sensitive market, when privacy is a factor, consumers with weak brand loyalty can be driven away from the popular retailer because of a targeted coupon from that retailer.