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Based on what I have read about Google's recent Panda and Penguin updates, I'm getting the impression that using semantic markup may help improve SEO results.

On a EMD (exact match domain) site, that may have been hit, we list location-based products. We are now going to be adding a itemtype="http://schema.org/Product" to each product, with relevant details.

However, that product may be available in Los Angeles and also in appear in a Seattle results page.

We could add a LocalBusiness item type on each geo page to define the geo location for that page. While the definition states:

A particular physical business or branch of an organization. Examples of LocalBusiness include a restaurant, a particular branch of a restaurant chain, a branch of a bank, a medical practice, a club, a bowling alley, etc.

We could add use the location property which would simply include the city/state details.

I realize that this looks like it is meant for a physical location, however could this be done without seeming black-hat?

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First of all, microdata doesn't currently affect ranking. It can indirectly benefit ranking on account of the Rich Snippets it's used to produce, but I would expect most benefit to be in click-through.

It also won't mitigate any activities that have lead to your site receiving penalties (under Panda, Penguin or anything else).

The only location microdata that Google currently supports is Organization, and apparently is used principally as a support to event and review data, as well as Places pages. So it doesn't appear that it could target product pages to physical locations, even if used correctly.

As you say, LocalBusiness is meant for marking-up details of a physical location, so it won't do what you want and, in any case, doesn't appear to be supported yet.

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