Food Delivery Service and Restaurant: Friend or Foe?
Operations Research and Operations Management
Manlu Chen, Ming Hu, Jianfu Wang
Published in Management Science, February 2022
Food delivery services have increased exponentially in recent times, with one major Hong Kong provider reporting a more than 50% increase in the two-year period to early 2022. With no sign of a let up in post-Covid times it is crucial to investigate the long-term impact of such services on the traditional restaurant industry.
Jianfu Wang, Associate Professor in the Department of Management Sciences, and co-authors model a restaurant serving food to customers as a stylized single-server queue with two streams of customers. One stream consists of tech-savvy customers who have access to a food delivery service platform. The other stream consists of traditional customers who are not able to use a food delivery service and only walk in by themselves.
Wang and co-authors study a Stackelberg game, in which the restaurant first sets the food price; the food delivery platform then sets the delivery fee; and, last, rational customers decide whether to walk in, balk, or use a food delivery service if they have access to one. If the restaurant has a sufficiently large established base of traditional customers, they show that the food delivery platform does not necessarily increase demand but may just change the composition of customers, as the segment of tech-savvy customers grows. Hence, paying the platform for bringing in customers may hurt the restaurant’s profitability.
They demonstrate that either a one-way revenue-sharing contract with a price ceiling or a two-way revenue-sharing contract can coordinate the system and create a win-win situation. Furthermore, under conditions of no coordination between the restaurant and the platform, they show, somewhat surprisingly, that more customers having access to a food delivery service may hurt the platform itself and the society, when the food delivery service is sufficiently convenient, and the delivery-worker pool is large enough. This is because the restaurant can become a delivery-only kitchen and raise its food price by focusing on food-delivery customers only, leaving little surplus for the platform. This implies that limiting the number of delivery workers can provide a simple yet effective means for the platform to improve its own profitability while benefiting social welfare.
