Location Sponsorship in Location-based Augmented Reality Gaming : A Game-Theoretic Model

As a new revenue source for game companies, location sponsorship in location-based augmented reality (LBAR) gaming has become increasingly important in helping brick-and-mortar stores generate foot traffic. In this paper, through the lens of a game-theoretic model, we investigate how competing brick-and-mortar sellers can leverage LBAR games as an effective marketing strategy by becoming in-game sponsored locations. In particular, we analyze the sellers’ equilibrium pricing and sponsorship adopting strategies and the game company’s optimal strategy for designing location sponsorship. Our results show that location sponsorship can lead to a win-win-win situation for the game company, sellers, and game players. Sometimes, even a non-adopting seller can benefit from the competitor’s unilateral partnership with the game company. However, sellers should also be aware that location sponsorship adoption is not always beneficial. Specifically, when the game players have a relatively high probability of making impulse purchases, sellers’ appetite for a larger market share through adopting location sponsorship will lead them to fall into the prisoners’ dilemma if they both adopt. Interestingly, in this case, sellers can benefit from a low probability of the players making impulse purchases when passing by a seller during gameplay. Moreover, having a more attractive sponsored location for the players, even if doing so incurs no extra cost, does not necessarily help increase the profit of the game company. Another interesting finding is that location sponsorship, as a marketing strategy to attract game players through enhancing their gaming experience, has an adverse impact on the welfare of consumers who are not game players due to the resulting price increase. Our results provide important insights that can help brick-and-mortar stores, game companies, and policymakers devise appropriate strategies and policies