Managing Relationships Between Restaurants and Food Delivery Platforms: Conflict, Contracts, and Coordination

Abstract

Restaurant delivery platforms collect customer orders via the Internet, transmit them to restaurants, and deliver the orders to customers. They provide value to restaurants by expanding their markets, but critics claim they destroy restaurant profits by taking a percentage of revenues and generating congestion that negatively impacts dine-in customers. We consider these tensions using a model of a restaurant as a congested service system. We find that the predominant industry contract, in which the platform takes a percentage cut of each delivery order (a “commission”), fails to coordinate the system because the platform does not internalize its effect on dine-in revenues; this leads to prices that are too low, reducing the restaurant’s margins and leaving money on the table for both firms. Two commonly proposed remedies to this problem (commission caps and allowing the restaurant to set a price floor on the platform) can increase restaurant revenue but do not solve the coordination issue. We thus propose an alternative, practical coordinating contract that is a variation of the current industry standard: for each delivery order, the platform pays the restaurant a percentage revenue share and a fixed fee. We show that this contract, appropriately designed, coordinates the system, protects restaurant margins by ensuring a lower bound on its revenue per delivery order, and allocates revenue between the restaurant and the platform with a high degree of flexibility. This paper was accepted by Victor Martinez-de-Albeniz, operations management.

Designing professional services: Pricing and prioritization

“…(2022) and Feldman et al. (2023) extend Naor's framework to consider a decentralized service setting similar to ours (e.g., a restaurant and a food delivery platform). They study the incentive issues between decentralized players in serving a market of heterogeneous customers.…”

“…For amateur customers, their joining decisions also depend on the intermediary's fee decision. As the main goal of this paper is to understand how a provider of a complex professional service should treat various customer segments differentially on pricing and prioritization, we abstract away the contracting issues between the provider and intermediary (see Feldman et al., 2023 and Chen et al., 2022 for a relevant discussion) and focus on a simple setting in which the intermediary generates revenues by charging amateur customers a separate fee. We present a detailed formulation of the intermediary's fee decision and amateur customers' joining decisions in Subsection 3.2.…”

Improving Dispute Resolution in Two-Sided Platforms: The Case of Review Blackmail

“…In a crowdfunding context, Zhang et al (2017) study how the dynamics of the pledging process affect the optimal pledging level and campaign duration; Chakraborty and Swinney (2021) consider whether entrepreneurs can signal the quality of their product through their choice of crowdfunding campaign parameters; and Babich et al (2020) study how crowdfunding interacts with more traditional financing sources such as venture capital and bank financing. Feldman et al (2021) consider whether food-delivery platforms benefit restaurants. Kanoria and Saban (2021) show that search inefficiencies in matching markets can be alleviated by placing restrictions on agents' actions.…”

Sustainable successes in third-party food delivery operations in the digital platform era

“…They showed that only one platform can result in a "payoff dominant stable equilibrium" who will take all the benefit. Feldman et al (2022) explored a congested service system of the restaurant and analytically analyzed the supply chain performance under the commonly seen simple revenue-sharing contract in a supply chain with one restaurant and one thirdparty delivery platform. They concluded that a simple revenue-sharing contract is inefficient to coordinate the supply chain and harms the profitability of the restaurant.…”

“…Economic sustainability is a crucial dimension in triple bottom line (TBL) framework as the business firms have to be profitable for survival in the competitive marketplace. In the existing literature, two articles analytically examined the supply chain performance under the revenue-sharing contract and proposed the mechanism to achieve supply chain coordination Feldman et al, 2022). In real-world observation, we have found that third-party food delivery platform offers new subsidy scheme to restaurants to lessen their financial burden on the commission fee.…”