Computers & Industrial Engineering 121 (2018) 131–138

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Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

A game theory approach to online lead generation for oligopoly markets T

a,⁎ b a c
Aneesh Zutshi , Diogo Mota , Antonio Grilo , Marta Faias
a
UNIDEMI, FCT, Universidade NOVA de Lisboa, Portugal
b
Ernst & Young, Portugal
c
FCT, Universidade NOVA de Lisboa, Portugal

A R T I C LE I N FO A B S T R A C T

Keywords: Digital marketing has received much attention from most firms recently. With the increasing competition and
Digital marketing exigency, marketing managers’ need for reliable and scientifically supported decision systems to assist them has
Lead generation never been greater. This paper presents a management model for estimating the quantity of online leads they
Online leads should generate in a given period of time in order to achieve their goal, measured in terms of contracts gained in
Game theory
the most effective and efficient way possible. Through the application of Game Theory, the strategies of the rival
Nash and stackelberg equilibrium
firms are taken into account to provide marketing managers with a set of reliable possible decisions that can
provide a competitive advantage. Results show a clear improvement of the effectiveness and efficiency of the
decisions. In certain scenarios, an increase in the quantity of online generated leads by a firm leads to a positive
impact on the firm’s and the competitors’ sales. Results obtained from the Nash and Stackelberg equilibria show
that the Stackelberg equilibrium is more efficient, given the higher expected profits it derives and the follower in
the Stackelberg equilibrium yields a higher expected profit than the leader or first mover.

1. Introduction
The importance of digital marketing and online advertising has been
rising for years, and the fact that there are already online business
services with the sole purpose of giving advice regarding how much
capital a firm should invest in digital marketing is a proof of that. Much
of the advertising effort carried out by firms is going toward digital
media such as the internet rather than other offline channels.
Consumers tend to seek quality information, or in other words, the
information they can gather when planning to purchase new products
(Zhu & Zhang, 2010). The emergence of digital marketing made the
search for products or services by the consumers much easier and “with
the Internet’s growing popularity, online consumer reviews have be-
come an important resource for consumers seeking to discover product
quality” (Zhu & Zhang, 2010). The online marketing channels have
become one of the most important marketplaces for transactions of
goods and services (Leeflang, Verhoef, Dahlström, & Freundt, 2014). A
2015 study shows a clear rapid growth trend in spending on online
advertising (PwC, 2015). The report shows that online ad spending
grew by 15.6% year-over-year in 2014, from $42.8 billion to almost
$49.5 billion. The world of digital marketing has potential challenges
for virtually every firm that makes a use of it, namely: (1) the ability to
generate and leverage deep customer insights; (2) Managing brand
health and reputation in a marketing environment in which social
media play an important role; and (3) Assessing the effectiveness of
digital marketing (Leeflang et al., 2014). To mitigate the challenges it is
important to recognize and know the consumer’s behavior and decision
process within the digital marketplace (Teo & Yeong, 2003).
The aim of this paper is to present a management model for esti-
mating the quantity of online leads a firm should generate in a given
period of time in order to achieve its goal, measured in terms of con-
tracts gained in the most effective and efficient way possible. When
compared to the literature, the model proposed here is static, and can
thus be easily applied in any firm, regardless of the competitive and
market environment without the experience, knowledge, and expertise
that would be needed in order to apply a complex dynamic model.
Another innovative feature of the proposed model as compared to the
earlier proposed models is that it is based on the quantity of online
generated leads and sales, not the monetary amounts of investment or
revenue. In earlier works monetary values were always used, but due to
the great difficulty in estimating the monetary investment and revenue
in this particular field of the rival firm (and the fact that it is much
easier and more reliable to estimate only the quantity of online gen-
erated leads and contracts sold in a period, and the estimation of the
profit per online contract can also be obtained with ease), the model
presented in this paper does not have monetary values as the basis for
its formulation and applications.
In this paper, we propose a game theory based management model

⁎
Corresponding author.
E-mail addresses: aneesh@fct.unl.pt (A. Zutshi), d.mota@campus.fct.unl.pt (D. Mota), mcm@fct.unl.pt (A. Grilo), acbg@fct.unl.pt (M. Faias).

https://doi.org/10.1016/j.cie.2018.04.045
Received 24 May 2017; Received in revised form 2 April 2018; Accepted 23 April 2018
Available online 26 May 2018
0360-8352/ © 2018 Elsevier Ltd. All rights reserved.
A. Zutshi et al.
that estimates the quantity of online generated leads and the online
contracts gained based on competitor’s actions. We explore how ad-
vertising levels of a firm have implications on the rival firms’ sales. One
intuitive conclusion that is often made is that increased advertising
harms the competitors, but as explored in this model, it is often not the
case. We analyze the predicted evolution of the online leads and con-
tracts sold if the firms would have employed this model, and its impact
on sales and profits.
The paper is organized as follows: Section 2 Presents the Literature
Review. Section 3 presents the mathematical formulation of the gen-
eralized model proposed. In Section 4 the significant parameters of the
model are determined, an application scenario is formulated and its
results analyzed, and finally the Nash and Stackelberg equilibria are
obtained and discussed. Last, the conclusions and recommendations for
future work are presented in Section 5.
2. Literature review
Every firm searches for an effective and efficient way to reach their
respective market and gain competitive advantage over rivals, and one
way to achieve this is through careful planning and implementation of
advertising. A lead is generated “when a visitor registers, signs up for,
or downloads something on an advertiser’s site. A lead might also
comprise a visitor filling out a form on an advertiser’s site” (Ryan &
Jones, 2009). To gather initial consumer interest and inquiries into a
firm’s product or service, leads are generated, and today’s marketing
managers struggle greatly in this process due to the lack of a solid,
scientifically supported management model to assist them in the deci-
sion of the quantity of online leads to be generated at an efficient level,
leading to waste of financial and human resources. A study developed
by Sirius-Decision Inc. in 2006, determined that on average, (just) “B2B
firms spend 65% of their marketing budgets on activities such as trade
shows, product seminars, cold-calling, data-base purchases, tele-
marketing and other activities” to attract new customers (Sabnis,
Chatterjee, Grewal, & Lilien, 2013). This is nothing more than gen-
erating leads. These leads are considered offline leads but the principle
and goal are the same, with firms shifting their attention to generating
online leads. But there is still a lack of scientific articles that not only
explain and provide information regarding this subject but also that
develop methodologies for better ways to generate online leads. How-
ever, articles in business magazines and websites such (Forbes, 2015;
eMarketer, 2015) have published very recent articles as of 2015, pro-
viding evidence of the growing importance of online leads. Most mar-
keting managers currently generate online leads according to their
experience, or even “gut feeling”. A global survey by McKinsey & Co.
reports “that companies tend to allocate marketing spending based on
historical allocations and rules of thumb far more than quantitative
measures” (Raman, Mantrala, Sridhar, & Tang, 2012).
The marketing resource allocation decisions made by managers are
becoming increasingly more complex due to the proliferation of new
channels, mainly digital (Raman et al., 2012; Barwise & Farley, 2005).
The application of game theory to the problem of lead generation and
developing a management model revolving around this theory is nat-
ural and intuitive. Firms interact strategically with each other and try to
understand what each one is doing in order to gain advantage - by
making decisions based on their knowledge of the actions of their
competitors - that can be measured in market share, revenue, or profits.
The decision of how many leads to generate each period is directly tied
with how many leads a firm believes its competitors will generate,
because it has an important effect on the firm’s operations. Many au-
thors have studied the subject of advertising resource allocation in
oligopolies (Friedman, 1958; Erickson, 2009; Chintagunta & Vilcassim,
1995), and some authors have studied it in duopolies (Chintagunta &
Vilcassim, 1992; Schoonbeek & Kooreman, 2007; Erickson, 1992). The
research done on this topic also differs between static markets
(Friedman, 1958; Gupta & Krishnan, 1967) and dynamic market
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Computers & Industrial Engineering 121 (2018) 131–138
settings (Erickson, 2009; Eliashberg & Chaterjee, 1985). Static mod-
eling has great advantages because it proves to be useful in order to
understand basic empirical results when innovations are introduced,
such as in the case of the present paper, by providing a ready-to-use
management model (Viscolani, 2012). Also, static modeling often pro-
vides explicit results that are crucial for the firms (Schoonbeek &
Kooreman, 2007). The study is made for one period because it is as-
sumed that there are no carry-over effects of the actions taken.
The growing importance of the Internet to B2B customer purchasing
decisions has motivated B2B sellers to create digital content that leads
potential buyers to interact with their company. This trend has en-
gendered a new paradigm referred to as ‘content marketing’ (Järvinen
& Taiminen, 2016). The work developed by Balakrishnan, Dahnil, & Yi,
2014 indicate that marketing managers that use social media marketing
medium have become an important marketing tool to reach emerging
younger generation consumers. They also state that cyber world plays
an important role in modern marketing, enabling marketers to reach
customers faster and more efficiently.
This paper assumes, much like the literature, that the level of ad-
vertising of a firm directly affects its sales – this does not necessarily
mean that the rhythm of increased advertising matches exactly with the
rhythm of increasing sales, because it is assumed (and it is realistic) that
the effects of own and competitive advertising sales are subject to di-
minishing returns (Chintagunta & Vilcassim, 1995).
This paper focuses on the concept of reaction functions to evaluate
the strategic selection of the quantities of online generated leads. It was
first introduced by Lambin, Naert, and Bultez (1975), and it allows for
several competitive reactions, such as when an increase in advertising
by a firm is responded to by a price cutting effort by the competitor(s).
It allows for the strategy selection by any number of firms, considering
the strategies (or estimation of the strategies) employed by the com-
petitors, and it also allows for the formulation of various what-if sce-
narios (Chintagunta & Vilcassim, 1995).
There is also a compelling idea related to the particular application
of the theory of games, that the advertising levels of a firm have im-
plications on the rival firms’ sales and advertising levels (Viscolani,
2012). One can intuitively think that the effect would be to hamper the
sales of the competitors, but this might be an imprudent thought be-
cause the effect depends greatly on several factors such as the industry,
the competitive environment, and the product or service commercia-
lized.
3. Model formulation
We assume that there are N firms in the market, indexed i= 1,2,…,N .
We do not make any assumption on whether the effects of the own
advertising or the advertising of the competitors are positive or nega-
tive in the firm’s sales. We model the behavior of the firms by means of
a strategic game in which both firms choose the online leads that
maximize their profit, while taking into account that the sales of each
depend on the online generated leads of both firms. For the sales re-
sponse function, the natural logarithm functional form was chosen
because of an assumption that is made for the model whereby the effect
of the own and the competitors’ online contracts sales are subjected to
diminishing returns. Additionally, estimating a natural logarithm
functional form produces estimates with constant elasticity. Thus, the
sales response function is formulated as follows:
N
Si = α i (L i)βi ∏ (L j) γij , i= 1,2,…,N
j=1
j≠i (1)
where Si are the sales (online contracts) of firm i in a given period of
time, α i is a firm-specific intercept term, L i and L j represent the quantity
of online leads generated by firms i and j respectively in a given period
of time, βi and γij are the parameters that measure the sensitivity of firm
A. Zutshi et al.
i ’s sales to its own quantity of online generated leads and firm j ’s leads
respectively.
As is considered in (1), if the firms operate in an oligopoly, they
have to take into account the strategies employed by all their compe-
titors and choose their own strategies accordingly. In other words, they
are playing and considering each other’s best responses, and thus it is
assumed that Nash behavior by the firms operating and competing in
the market prevails.
Now, let Πi denote firm i ’s profit function. Then,
Πi (L1,⋯,L i,⋯,LN) = kiMi Si−L i , i= 1,2,…,N (2)
where ki is a firm-specific factor that standardizes the units of the profit
function (these are formulated and described in more detail below). Mi
is the unit contribution for firm i , calculated knowing each firm’s cost
structure. The unit contribution is no more than the profit per online
contract of each firm. To know the unit contribution it is imperative to
know (or have an estimation) of the cost structure, relative to the
product that is the target of study, of the firm studied. In the unit
contribution the investment in online lead generation should not be
included, as is made clear by (2). However, due to the difficulty in
gathering the necessary data regarding the investment in online leads
by the rival firm (this difficulty generally exists) throughout most in-
dustries, many firms do not know these data regarding their rival(s)).
The unit contribution presented is truly the profit per online contract
sold including the online lead generation investment. As is seen below,
this has no effect on the results since this method is used herein for both
firms and since the profits calculated are actually percentage changes in
profit relative to the actual profit of each firm. It is therefore all stan-
dardized and no mathematic or logical concern should arise from the
application of model. The unit contribution is measured between 0 and
1; with 0 being no profit per online contract; and 1 being 100% profit
per online contract.
The first step to determine the quantity of online leads to be gen-
erated in order to maximize the above functions is to substitute (1) into
(2) and the quantity of online generated leads that maximizes the above
function is obtained by solving:
∂Πi
= 0 , i= 1,2,…,N
∂L i (3)
In order to guarantee that the reaction functions are indeed reaction
functions, meaning that those functions return the best option for a
player given the other players’ strategy (in order to guarantee the
payoff maximization – and additionally, in order to guarantee that if the
players’ solutions intersect then that point is the Nash equilibrium), it is
imperative that the 2nd order conditions are verified, i.e. the resulting
derivatives must be negative, because if not, then there are no reaction
functions and the model cannot be used. If the conditions are verified,
then when (3) is solved, it yields the following reaction function:
N
⎛ −ln(α ikiMi βi)− ∑ j=1 γijlnL j ⎞
⎜ j ≠i ⎟
L i (L j) = exp ⎜
βi−1 ⎟ , i= 1,2,…,N
⎜ ⎟
⎝ ⎠ (4)
The factor (parameter) ki is calculated by solving the above function
for ki , yielding the following relationship:
L i 1 − βi ΠNj=1L j −γij
j ≠i
ki = , i= 1,2,…,N
βi Mi (5)
where L i and L j are the arithmetic averages for the entire period under
study for the online generated leads of firms i and j, respectively.
The factor ki is formulated using the averages of the total online
generated leads in the studied, or targeted, period. However, this is
merely one of the many ways that a firm has to determine its own k
factor. A firm can, for example, select a specific month, such as the one
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Computers & Industrial Engineering 121 (2018) 131–138
with the best conversion rate, and determine the factor with that data.
A firm might even state that its goal and best strategy is to generate
three times more online leads than its rival, and determine the factor
accordingly.
Finally, to calculate the Nash equilibrium – at the equilibrium, no
firm has an incentive to change the quantity of online leads to generate,
and it is the intersection between the firms’ reaction functions – the
following system is solved:
L= Q−1P (6)
⎡ Ln (L1) ⎤
⎢ ⋮ ⎥
⎢ ⎥ βi−1,ifi = j
where, L = ⎢ Ln (L j) ⎥, Q= [Q ij]i,j = 1,… ,N where Q ij = ⎧
⎢ ⋮ ⎥
⎨ γ ,ifi ≠ j
⎩ ij
⎢ Ln(LN) ⎥
⎣ ⎦
⎡ − ln(α1k1M1 β1) ⎤
⎢ ⋮ ⎥
⎢ − ln(α k M β ) ⎥
P= ⎢ j j j j ⎥
⎢ ⋮ ⎥
⎢− ln(α k M β ) ⎥
⎣ N N N N ⎦
The Stackelberg equilibrium is not generalized because it makes no
sense to perform this formulation given that this equilibrium offers a
solution when there are two firms and one of them selects its strategy
before the other makes its selection. When the market has more than
two firms, some assumptions need to be made. For example, when three
firms compete in the same market, to compute the Stackelberg equili-
brium an order of strategy selection needs to be made where one as-
sumption can be that firm A and firm B select their strategy first and
firm C selects its own secondly (and as a result, several other assump-
tions can be inferred).
4. Application scenario
Our aim is to provide a management model that indicates the
quantity of online leads that a firm should generate in order to max-
imize its profit. The previous section presents the generalized model,
making possible the use of model by any firm, in any industry, with any
competitive environment. Because of the lack of quality of the data, and
being not so recent, the data for the application scenario developed and
the results computed are from a duopoly Portuguese market scenario a
few years ago. It was possible to obtain only older data due to data
sensitivity issues (companies were not ready to disclose more recent
data).
4.1. Characterization of the application scenario
Table 1 represents a real market’s data from firms A and B – it is a
duopolistic Portuguese market where firm A has a market share of 45%
and firm B has a market share of 55%. This is a consumer-based market
where the consumers’ buying decisions are rational and pondered in-
stead of instinctive, though sometimes there are spot peaks due to, for
example, news in the media and advertising campaigns. The data span
16 months, from January 2014 to April 2015, monthly quantity of sold
online contracts, online leads generated by both firms, and the quantity
of offline leads generated by firm A. The data from firm A are exact,
while the data from firm B are based on estimations, and although they
are a good approximation of reality, they represent only estimates of
professionals with market intelligence. In a real world context this is the
case with most firms, i.e. a firm does not always know exactly what its
competitors are doing but they have estimates.
In Table 2 the results from the estimation of the sales response
function are presented. The values of each estimated parameter are
presented, as well as their standard errors and whether or not they are
A. Zutshi et al. Computers & Industrial Engineering 121 (2018) 131–138

Table 1 both firms. These values give confidence to take the analysis further. All
Data set from each firm. the parameters are now significant at least at the level of 5 percent,
Month Online Online Online Online Offline with the parameters βA and βB being significant at the level of 0.1
Contracts_A Contracts_B Leads_A Leads_B Leads_A percent. The parameter βA measures the sensitivity of firm A’s sales (of
online contracts) to its own quantity of online generated leads where if
Jan 14 98 155 852 780 525
the quantity of leads generated online, by firm A increases by 1%, then
Feb 14 110 200 534 1950 558
Mar 14 116 231 678 1950 681
the sales of online contracts of firm A would increase by 0.446%, due to
Apr 14 114 256 825 1560 582 the constant elasticity brought by using the natural logarithm func-
May 14 111 267 502 5850 685 tional form. Similarly, for firm B the parameter βB measures the sen-
Jun 14 198 501 227 7800 907 sitivity of firm B’s sales (of online contracts) to its own quantity of
Jul 14 275 561 703 7800 785
online generated leads where if the quantity of leads generated online,
Aug 14 210 267 574 780 565
Sep 14 127 299 571 1950 737 by firm B increases by 1%, then the sales of online contracts of firm B
Oct 14 88 301 488 3900 1081 would increase by 0.535%. The positive sign of both these values comes
Nov 14 39 287 118 3900 1191 as no surprise, since it means that the sales of online contracts by a firm
Dec 14 34 54 90 780 709
increases when the quantity of online generated leads by the same firm
Jan 15 88 110 334 780 499
Feb 15 133 210 861 1950 519
increases as well (βA > 0 and βB > 0 ). While this observation comes as
Mar 15 144 202 1176 1950 598 no surprise, the signs of the parameters γAB and γBA ’s estimations might
Apr 15 80 176 1191 1560 589 be counterintuitive, because γAB > 0 and γBA > 0 . Even according to the
literature, especially (Viscolani, 2012), who states that there is a
compelling idea related to the particular application of the theory of
Table 2 games, that the advertising levels of one firm, has (negative) implica-
Parameters’ estimates, (standard errors) and “significance level” for firms a and tions on the rival firms’ sales and own advertising levels. But unlike the
b for all parameters.
notion argued by Viscolani, 2012, the present study reveals something
Parameter Firm A Firm B entirely different. The fact that γAB is positive means that an increase in
the quantity of firm B’s online generated leads has a positive impact on
αA 0.981 –
the sales of firm A’s online contracts. If the quantity of firm B’s online
(1.427)
“Not Signif.” generated leads increases 1%, then the sales of firm A’s online contracts
αB – 0.715 will increase by 0.251%. And analogously, since γBA is positive, it means
(1.083) that an increase in the quantity of firm A’s online generated leads has a
“Not Signif.”
positive impact on firm B’s sales of online contracts. If the quantity of
βA 0.447 –
(0.145)
firm A’s online generated leads increases 1%, then firm B’s sales of
“1%” online contracts will increase by 0.214%. This discrepancy from the
βB – 0.560 literature - and what some might consider as common sense – and the
(0.104) results presented are justified due to the particular characteristics of the
“0.1%”
industry under study and the product it commercializes. Because the
γAB 0.252(0.137) –
“10%” product that both firms commercialize is something that a consumer
γBA – 0.237 never buys instinctively, but ponders greatly, an increase in a firm’s
(0.110) advertising has a positive effect on the other firm’s sales because the
“10%”
consumers also study their product and might want to analyze whether
R2 0.406 0.713
it has better characteristics, price, or both. Additionally, the fact that
this is a duopolistic market, forces a consumer to choose between only
two firms and that increases this effect. One can argue that due to the
Table 3
Parameters’ estimates, (standard errors) and “significance level” for firms a and
larger market share of firm B (and the much larger number of online
b for significant parameters. leads generated, as seen in Table 1), it would be intuitive to think that
the quantity of firm B’s online generated leads would have more weight
Parameter Firm A Firm B
in firm A’s sales of online contracts than the quantity of firm A’s online
βA 0.446 – generated leads would have on firm B’s sales of online contracts
(0.102) (γAB > γBA ), and that is what actually happens. Finally, it is interesting
“0.1%” to point out that the weight that the quantity of firm B’s online gen-
βB – 0.535
erated leads has on its own sales is greater than the same situation but
(0.063)
“0.1%” for firm A (βB > βA ).
γAB 0.251 – At this point we must analyze the residuals (which is/are the esti-
(0.083) mation(s) of the model/experimentation error(s)) in order to verify the
“1%” assumptions of the error normality and the variance homogeneity for
γBA – 0.214
both firms A and B, to ensure that no false conclusions are drawn from
(0.078)
“5%” the application(s) of these models. After the analysis, we concluded that
R2 0.994 0.997 the assumptions made for the models are valid and that no indication of
any strong violation of either the normality assumption or the homo-
geneity of the variance assumption was in evidence.
significant, and if they are, at what level of significance. The results With the residual analysis’ conditions met, the bootstrap technique
show a better fit for firm B, although both R2 show a disappointing fit. A is now utilized in order to better estimate the parameters of the re-
reason for these values to be below expectations may reside in the fact gressions. The use of this technique is especially important due to the
that neither firm-specific intercept term is significant. Thus, those terms small number of observations in the data (only 16 months of observa-
are removed from both sales response functions and the estimations are tions). Table 4 presents the final results of the parameters’ estimations
once again performed, with the results presented in Table 3. derived from to the bootstrap technique, and also provides the final
The results in Table 3 show an extremely good fit of the data for estimations (calculated by adding the original values to the bootstrap’s

134
A. Zutshi et al. Computers & Industrial Engineering 121 (2018) 131–138

Table 4 generated leads, the difference in the quantity of online sold contracts is
Bootstrap final result and estimations for firms a and b. zero. This too can be counterintuitive because with such an increase in
Parameter Original Bias Final Estimation Std error the estimated quantity of online generated leads, an increase in the
quantity of online gained contracts would be expected, but this does not
βA 0.4457097 0.004009137 0.449718837 0.1282706 happen. In Sep 14 an increase in the estimated quantity of online
γAB 0.2508342 −0.003207038 0.247627162 0.1060251 generated leads actually leads to a decrease in the estimated quantity of
βB 0.200756 −0.002381787 0.198374213 0.02352048
online sold contracts. This situation can also be explained by the un-
γBA 0.2282532 0.00630343 0.23455663 0.0519939
certainty of the monthly conversion rate, as it was in the situation re-
garding firm A. The estimated total quantity of online generated leads is
much less, 1920 fewer to be precise, than the actual value, while the
Table 5
Online leads and contracts estimation for firms a and b. estimated total quantity of online sold contracts is higher, by 120 units
than the actual value. This means that for firm B, these decisions can be
Month Estimated Estimated Estimated Estimated Online made in a much more efficient and effective manner, providing an in-
Online Leads_A Online Online Leads_B Contracts_B
Contracts_A
crease in profit of 12.14% when compared to the actual profit.
These results that we have obtained by considering that firms take
Jan 14 340 72 3321 322 decisions according with their reaction functions highlight the fact that
Feb 14 514 108 2658 258 firms can improve their market efficiency if they take into account the
Mar 14 514 108 2979 289
Apr 14 465 98 3271 317
behavior of their competitors. However when all firms behave this way
May 14 843 177 2581 250 we are lead to analyze equilibrium outcomes like the Nash equilibrium
Jun 14 959 202 1769 171 or Stackelberg equilibrium which we address in the following session.
Jul 14 959 202 3031 294
Aug 14 340 72 2752 267
4.2. Nash and Stackelberg equilibrium
Sep 14 514 108 2745 266
Oct 14 702 148 2547 247
Nov 14 702 148 1295 125 The Nash equilibrium computed for the model assumes that both
Dec 14 340 72 1138 110 firms made their decisions simultaneously, perhaps not simultaneously
Jan 15 340 72 2126 206 in time, but that neither firm knew what its rivals did when selecting
Feb 15 514 108 3338 323
their strategy for the period in question. The Stackelberg equilibrium
Mar 15 514 108 3873 375
Apr15 465 98 3896 377 shows what would happen if a firm decided on how many online leads
Total 9025 1901 43,320 4197 to generate before its competitor and then competitor will be aware of
the decision of the first mover firm. In this situation, how many online
leads should both firms generate? This is the question that the
bias values) that will be used in the application scenarios. Stackelberg equilibrium answers. Additionally, the profits from both
The application scenario to demonstrate the potential of the model situations (Nash and Stackelberg equilibrium) can be compared and
is described as follows: with the estimated values presented in Table 4, interesting conclusions can arise. Two versions are portrayed for the
and with the monthly estimations (or known data) of firm A’s and firm Stackelberg equilibrium: (1) Firm B moves first and firm A follows; and
B’s online leads, we calculate the firm’s reaction functions respectively, (2) Firm A moves first and firm B follows. In version (1) of the
to determine the quantity of leads that should be generated each month. Stackelberg equilibrium, firm B moves first, i.e. makes its decision first
With this data we can then estimate the quantity of online contracts by choosing the strategy that maximizes its profit function, taking into
that the firms would gain. The results are presented in Table 5. account that firm A moves afterward according to its reaction function,
By observing Tables 1 and 5, the only months in which the values of and accordingly firm A makes its decision based on firm B’s strategy,
the actual quantity of online generated leads and its estimation for the i.e. it uses its reaction function with firm B’s best strategy to determine
model presented for firm A are somewhat similar are Feb 14, Sep 14, what it should do (whereas firm B never uses its reaction function, it
and Jan 15, although the difference in Sep 14 can be considered as just chooses the best strategy by taking into account the rival’s reaction
somewhat high. During these months the difference in the quantity of function into its profit function and selects the strategy that maximizes
contracts sold online varies, where in Feb 14 it is estimated that firm A the profit). In version “(2)”, the only difference is that the first mover is
would have sold 2 fewer online contracts, in Sep 14 19 fewer, and in firm A and firm B follows. Version (1) might be considered more in-
Jan 15 16 fewer. There are some months with results that may seem tuitive because since firm B has a greater market share and more fi-
counterintuitive because, for example, the estimation might suggest a nancial power than firm A, and thus it may face more risks and should
lower quantity of online leads to be generated and then the estimated have more incentive to make its decision first. For firm A this situation
quantity of contracts sold online would be higher (or the inverse), as is also makes sense because, since the quantity of firm B’s online gener-
the case of Jul 14, Jan 15, and Apr 15. This might happen due to the ated leads has a positive influence on the sales of online contracts of
fact that in these months the conversion rate from online lead to online firm A, this firm might have an incentive itself to wait for a decision
contract follows an extremely unusual pattern when compared to the from firm B and then make its decision afterwards. The mathematical
generality of the other months, and because there is a high degree of formulation of the Nash and Stackelberg equilibrium used in the ap-
uncertainty when it comes to this rate. It is important to point out that plication scenario are presented in Appendix A.
throughout the 16 months, according to the model it is estimated that Two versions of the Nash and Stackelberg equilibria are formulated,
firm A would have generated 699 fewer online leads than it actually did calculated, and compared with each other. These versions are based on
and it would have gained 64 fewer online contracts than it actually did, the form of how the factors kA and kB are calculated. This calculation is
for a change in profit of −0.04% compared to the actual profit ob- done only once, being kA and kB parameters of the model, meaning that
tained, which is to say that there is virtually no difference in profit after assigning values to the parameters, that value is not changed in
(considering the actual and estimated monetary values). the subsequent utilizations of the model.
For firm B, although there are no months in which the estimated
quantity of online generated leads is similar to the actual values, there (I) For this version both factors are determined through the use of LA
are two months that have very interesting results, namely Aug 14 and and LB , 608 and 2827 online leads respectively. When determined
Sep 14. For Aug 14, although the difference between estimated online in this way, using the same values for the calculation of both fac-
generated leads and its actual value is 1972 more estimated online tors, the Nash equilibrium is pre-determined. Since the Nash

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equilibrium is the intersection of the firms’ reaction functions, usually yields a lower profit when compared to its Nash equilibrium
when the same values are used, that intersection is exactly that (Dutta, 1999). What we see happen in (A) is the opposite. The results
point (608, 2827). show that the leader (firm B), although it does yield a higher profit
(II) For the second version to be presented, each factor is calculated when compared to the expected profit in the Nash equilibrium, it yields
with different quantities of online generated leads. Firm A esti- a lower expected profit than firm A (the follower). And consequently, as
mates that firm B generates the same monthly average number of is clear, the follower yields a higher expected profit when compared to
online leads (2827), however, for its own quantity of online leads, the Nash equilibrium. An explanation for the expected profit of firm A
firm A computes the average of the data of the four months of 2015 being higher than firm B’s can be found in the fact that, according to
and fixes its quantity accordingly (890 online leads). For the factor what was already mentioned, the greater the quantity of firm B’s online
kB , firm B sets LA to 608 online leads and LB to 3040 (five times generated leads, the more positive impact it has on the sales of firm A.
more than LA ). Recall that these parameters are a simply normal- And since firm B is the leader in this scenario, it chooses first its
izations of the variables. quantity of online leads to be generated and then firm A inserts that
quantity in its reaction function. In scenario (2), in which firm A is
Table 6 presents the results of the versions depicted and compares leader and moves first, the analogous happens. The expected profits for
the profit of each version with the actual profit. The profit is stated to be both firms are higher than the Nash equilibrium’s and firm B (the fol-
0%, because it is with the percentage variation in profit that the dis- lower) yields a much higher expected profit than firm A.
cussion is made. All other percentage results show the difference when For the version (B) the same thing happens. The quantities of online
compared to the actual profit. generated leads in both equilibria and for both firms are higher than
In every scenario, either Nash or Stackelberg equilibrium, the ex- their respective values in version (A). Once again it is important to
pected profit is much higher than the actual profit verified. In version evaluate the feasibility of these equilibria due to the budget limitations
(A) of the Nash equilibrium we can see that the quantities of both firms’ of the digital marketing department. The expected profits in this ver-
online generated are equal to the average actual quantity throughout sion’s equilibria are consequently also higher than their respective va-
the period studied. This happens because of the way in which the fac- lues in version (A). The analysis for the Nash equilibrium and the (2)
tors kA and kB are determined. If the values LA and LB are the same when version of the Stackelberg equilibrium is analogous to the analysis de-
calculating both factors, the Nash equilibrium is being fixed, or pre- veloped for the respective cases in (A). However, for the (1) version of
determined, since it is the intersection of the reaction function through the Stackelberg equilibrium a different result is reached. The expected
which the factors are determined. But although the quantities of both profit of the leader (firm B) is higher than the follower’s and this is the
firms’ online generated leads are equal to the real scenario, the quantity only situation here portrayed in which this happens, which is the si-
of both firms’ contracts sold online is higher. This means that with the tuation that the literature states to be what normally occurs (although
same total quantity of online generated leads, with a monthly quantity the difference in the expected profit of the leader and the follower is
redistribution of the leads, both firms can achieve a higher profit, little, only 1.57%). Although this result follows what the literature
+7.64% for firm A and +17.11% for firm B. Both versions (1) and (2) states, the expected profit of the follower (firm A) is once again higher
of the Stackelberg equilibrium show an increase in profit, in the when compared to the Nash equilibrium’s.
quantities of online generated leads and online sold contracts by both What we observe in Stackelberg equilibrium is that the in both
firms. As can be seen, the quantity of online generated leads in both cases, I and II, the leader generates a higher proportion of leads when
versions of the Stackelberg equilibrium is higher than the average compared with the case where he is the follower, however this high
verified, and thus each firm should ask itself it has sufficient financial percentage of leads are not converted in a higher percentage of con-
funds (budget) to generate such a quantity of online leads on a con- tracts, that is, when the firm is the follower it generates much less leads
tinued basis. The results show that the Stackelberg equilibrium is ac- compared with the leader case but the induced contracts are not so less
tually more efficient than the Nash equilibrium since the expected as the case of the leader.
profit from the Stackelberg equilibrium is higher. The leader (which in Summing up, in the Stackelberg equilibrium the leader generates
the case of (A) is firm (B) is able to make a higher profit when compared much mores leads than when he is the followers but does not sell much
to the solution provided by the Nash equilibrium, and the follower, more contracts than when he is the follower. We can interpret this as
follows, the leader is the firm that first generates leads and he is aware
that the follower will take advantages of these leads (since the para-
Table 6 meters gamma_AB and gamma_BA are positive) then he anticipates that
Profit comparison actual vs nash vs stackelberg equilibrium. the follower will not generate to much leads which induce him to
Firm Delta Profit generates more leads. This higher level of leads is not converted in a
A B Firm A Firm B high level of sold contracts because part of these leads will be converted
Actual
in sold contracts for the follower.
Online Leads 608 2827 0% 0%
Online Contracts 123 255 In the case of the follower, he takes advantage of the leads gener-
ated by the leader who moves first and then by incorporated this in his
A) Nash Equilibrium
Online Leads 608 2827 +7.64% +17.11%
reaction function, generates a level of leads lower than the leader but
Online Contracts 128 274 this does not imply that he sells a lower level of contracts.
Stackelberg Equilibrium The positive spillover effect that the leads of one firm have in the
1) Online Leads 753 4554 +33.41% +23.95% sold contracts of the competitor firm may imply that the follower has a
Online Contracts 158 369
higher profit than the leader since he generates less leads, which means
2) Online Leads 1042 3655 +14.84% +51.4%
Online Contracts 174 354 lower costs, but does not necessarily means to sell less contracts. All of
these effects are intensified for the firm that has the higher market
B) Nash Equilibrium
Online Leads 1030 3908 +26.73% +49.87% share.
Online Contracts 176 366
Stackelberg Equilibrium 5. Conclusion
1) Online Leads 1277 6295 +57.05% +58.62%
Online Contracts 218 480
The contribution of this paper is a proposed management model
2) Online Leads 1766 5053 +35.19% +93.75%
Online Contracts 238 473 based on game theory to estimate the quantity of online generated leads
and the online contracts gained based on what the competitor is doing,

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(the online leads the rival generated during a period of time) we studied
the predicted evolution of the online leads and contracts sold if firms A
and B would have employed this model from the first month of the
study. The results were extremely encouraging despite a very slight
profit decrease in the case of firm A (−0.04%) because it was de-
monstrated that with the assistance of this model, firm B would have
needed to generate 4.2% fewer online leads to achieve a profit increase
of 12.14% from the selling of 3% more online contracts, thus making
the decision more effective and efficient.
Another very interesting result was derived from the parameters’
estimations that challenges some statements in the literature, and what
some might think as intuitive. It is the fact that we demonstrated that an
increase in the quantity of a firm’s online generated leads has a positive
impact on the sales not only of that firm, but also on the sales of the
competitor.
The expected profits from the application of the Nash and
Stackelberg equilibrium were found to be much higher than the actual
profits obtained by both firms. The results showed that the Stackelberg
equilibrium is actually more efficient than the Nash equilibrium, pro-
viding a higher profit in every situation portrayed, although it comes
also with a higher investment than the Nash equilibrium. The results
also showed that in all cases except one, the follower in the Stackelberg
equilibrium is able to generate a higher expected profit variation than
the leader (first mover).
A game theory based approach to develop a model to support the
marketing managers’ decisions on lead generation such as the one
proposed herein is very useful for virtually any firm, with the obvious
exception of a monopoly market, since it takes into account the stra-
tegies that its rival(s) is/are employing. It provides an excellent source
of benchmarking and competitive advantage by increasing a firm’s ef-
ficiency and effectiveness in its performance. The results also show the
potential that this model has in this particular task.
For future work the authors recommend using a greater data set to
more accurately estimate the parameters, modeling the factors kA and
kA as random generated numbers through a probabilistic distribution,
and applying the model at a large scale to assess its efficiency.

Appendix A

The reaction functions of firms A and B are written as follows:

γAB
1
LA = (kA MA βA) 1 − βA LB1 − βA (A.1)
γBA
1
LB = (kB MB βB ) 1 − βB LA1 − βB (A.2)
To calculate the Nash equilibrium the first order conditions (3) are written as a system, a natural logarithm is applied to each (A.1) and (A.2), and
the system is solved by using Cramer’s rule, thus:
1 − βB γA
LA = (kA MA βA) (1 − βA)(1 − βB ) − γA γB (kB MB βB ) (1 − βA)(1 − βB ) − γA γB (A.3)
γB 1 − βA
LB = (kA MA βA) (1 − βA)(1 − βB) − γA γB (kB MB βB ) (1 − βA)(1 − βB) − γA γB (A.4)
Additionally, if both firms are symmetric, i.e. βA = βB = β,γA = γB = γ ,MA = MB = M , the Nash equilibrium is as follows:
1
L = (kMβ ) (1 − β ) + γ (A.5)
Then, LA = LB = L .

(1) For the first scenario, firm A’s reaction function (A.1) is inserted into firm B’s sales function:
γBA γBA γAB
1 − βA
SB = (LB ) βB (kA MA βA) 1 − βA LB (A.6)
The previous equation is now inserted into (2) and the resulting equation is rewritten, yielding the following relationship:
γ γ γBA
βB + BA AB
ΠB (LA,LB ) = kB MB (LB ) 1 − βA (k M β ) 1 − βA −L
A A A B (A.7)
Firm B’s quantity of online leads to be generated in order to maximize its profit function is obtained by solving:
γBA β + γBA γAB
∂ΠB γ γ B −1
= 0 ⇔ ⎜⎛βB + BA AB ⎟⎞ kB MB (kA MA βA) 1 − βA LB 1 − βA
=1
∂LB ⎝ 1−βA ⎠ (A.8)
Thus, the Stackelberg equilibrium for firm B is given by:
1 − βA
γBA (1 − β )(1 − β ) − γ γ
γBA γAB ⎞
LB = ⎡ 1−β ⎤
A B BA AB
⎛
⎢ ⎜βB + 1−β ⎟ kB MB (kA MA βA) A ⎥
⎣ ⎝ A ⎠ ⎦ (A.9)
The Stackelberg equilibrium for firm A is given by substituting (A.9) into firm A’s reaction function (A.1). Thus, the rewritten Stackelberg
equilibrium for firm A is given by:
γAB
1 γBA (1 − β )(1 − β ) − γ γ
γBA γAB ⎞
LA = (kA MA βA) 1 − βA ⎡ 1−β ⎤
A B BA AB
⎛
⎢ ⎜βB + 1−β ⎟ kB MB (kA MA βA) A ⎥
⎣⎝ A ⎠ ⎦ (A.10)

(2) The second scenario is analogous. So, firm B’s reaction function (A2) is inserted into firm A’s sales function:

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γAB γAB γBA

SA = (LA) βA (kB MB βB ) 1 − βB LA1 − βB (A.11)

The previous equation is now inserted into (2) and the resulting equation is rewritten, yielding the following relationship:
γ γ γAB
βA + AB BA
ΠA (LA,LB ) = kA MA (LA) 1 − βB (k M β ) 1 − βB −L
B B B A (A.12)
Firm A’s quantity of online leads to be generated in order to maximize its profit function is obtained by solving:
γAB β + γAB γBA
∂ΠA γ γ A −1
= 0 ⇔ ⎜⎛βA + AB BA ⎟⎞ kA MA (kB MB βB ) 1 − βB LA 1 − βB
=1
∂LA ⎝ 1−βB ⎠ (A.13)
Thus, the Stackelberg equilibrium for firm A is given by:
1 − βB
γAB (1 − β )(1 − β ) − γ γ
γAB γBA ⎞
LA = ⎡ 1−β ⎤
A B BA AB
⎛
⎢ ⎜βA + 1−β ⎟ kA MA (kB MB βB ) B ⎥
⎣⎝ B ⎠ ⎦ (A.14)
The Stackelberg equilibrium for firm B is given by substituting (A.14) into firm B’s reaction function (A.2). Thus, the rewritten Stackelberg
equilibrium for firm B is given by:
γBA
1 γAB (1 − β )(1 − β ) − γ γ
γ γ
(kB MB βB ) 1 − βB ⎡ + AB BA ⎟⎞ kA MA (kBMB βB) 1 − βB ⎤
A B BA AB
LB = ⎛
⎢ ⎜βA 1−βB ⎠ ⎥
⎣⎝ ⎦ (A.15)

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Dr. Aneesh Zutshi is working as Invited Assistant Professor at the Department of
Industrial Management at Universidade Nova de Lisboa. He has several publications in
the area of Digital Business, Agent Based Modeling, Simulation and Management. He is
also the Project Manager at Project DIGISTART, a Startup Europe Initiative to bring
Entrepreneurial Education to the University. He has been engaged in research in
Entrepreneurship and training of students in the University and creation of Educational
Curriculum for young entrepreneurs and students to stimulate their motivation towards
Entrepreneurship and empowering them with the skills and abilities to conceptualize
ideas and bring them to market. His approach to entrepreneurship comprises of under-
standing and developing the inner motivations, interests, passions and connecting them to
a larger purpose that each entrepreneur wishes to achieve.
Diogo Mota received the B.S. degree and a MSc in Industrial Engineering and
Management from Faculdade Ciências e Tecnologia da Universidade NOVA de Lisboa,
Portugal. He has worked on research projects on Game Theory applied to digital mar-
keting. He currently is a consultant in the management consultancy company Ernest &
Young.
Professor António Grilo holds a PhD degree in Industrial Management from the
University of Salford, UK. He is Assistant Professor with Habilitation of Industrial
Engineering and Management at the Faculdade Ciências e Tecnologia da Universidade
NOVA de Lisboa, Portugal, in doctoral, master and undergraduate degrees, lecturing
Information Systems, Decision Models, Economics Engineering and Entrepreneurship. He
is the VP of the research centre UNIDEMI (Research and Development Unit for
Mechanical and Industrial Engineering). He has over 90 papers published in scientific
journals and international conferences. In the last 10 years he has been the coordinator of
several international and Portuguese research and development projects in the areas of
Cloud Computing, Big Data, and Artificial Intelligence applied to industrial and service
sectors, and received two awards for the relevance of his research. He is a board member
of the professional associations Portugal Management Institute – Portugal Chapter (PMI
Portugal Chapter), and of the Instituto Português de Engenharia Industrial (IPEI).
Dr. Marta Faias holds a BA in Mathematics by the Universidade de Lisboa and a PhD in
Economics by the Nova School of Business and Economics, Portugal. She is an Assistant
Professor at the Mathematical Department at the Faculdade Ciências e Tecnologia da
Universidade Nova de Lisboa, in doctoral, master and undergraduate degrees. Professor
Faias’s academic research focuses on theoretical issues applied to different topics in
Finance (endogenous assets, incomplete markets, indeterminacy, exchange markets for-
mation) and Economics (market games, differential and asymmetric information, public
goods provision, club formation). Her research has been published in journals such as
Economic Theory, Journal of Mathematical Economics, Mathematical Social Sciences,
Economic Theory Bulletin, Journal of Dynamics and Games, Decisions in Economics and
Finance and Review of Economic Design. CMA, Departamento de Matemática, Faculdade
de Ciências e Tecnologia da Universidade Nova de Lisboa Lisboa, Portugal.

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