Game Theory and PPC Marketing
1-800 Contacts has taken advantage of the internet advertising model of having companies pay every time a customer clicks on their ad (PPC), which has led to the US Federal Trade Commission suing them for anticompetitive behavior. They allegedly signed agreements with other sellers, which stated that the companies would not bid against one another in advertising auctions. 1-800 Contacts was only applying game theory in their decision to draw up agreements with other sellers.
Using AT&T and Verizon Wireless as an example, it is shown that using game theory to form agreements with other sellers would not only guarantee productive spending of money, but also reduce wasted spending in advertising. Similar to the coordination game, this game rests on the ability of the two competitors to come to an agreement. The agreement allows each company to an unlimited search keyword list, but prohibits going after people in the other company’s remarketing audience.
If AT&T and Verizon agree to target only people in each company’s respective remarketing audience list, then the return on investment for both companies is infinity. I did not specify a number because this return could depend on many other factors. There is no limit to the return each company could return. However, if neither agree, then they may achieve stealing the other’s customers, but neither is better off than the other, since they would have wasted money on poaching each other’s customers instead of targeting new ones. Additionally, there is no guarantee that the return from no agreement would exceed the return from an agreement.
The outcome of the game (number of new customers attracted) for AT&T is dependent on whether it chooses to extend and accept a deal with Verizon and if Verizon accepts. Just as the case of the coordination game with two Nash equilibria, this game does too (either both accept the deal or there is no deal). Basically, game theory benefits everyone and its competitors by producing a return on investment and less pressure in the auction (what you pay per click is proportional to what other advertisers are willing to pay for the same keyword).
Resource: http://smallbiztrends.com/2016/08/ppc-marketing-game-theory.html