Can Delivery Platforms Benefit Restaurants?

34 Pages Posted: 25 Oct 2018 Last revised: 2 May 2019

See all articles by Pnina Feldman

Pnina Feldman

Questrom School of Business, Boston University

Andrew E Frazelle

University of Texas at Dallas - Naveen Jindal School of Management

Robert Swinney

Duke University - Fuqua School of Business

Date Written: April 30, 2019

Abstract

In the restaurant industry, delivery platforms collect customer orders via web-based systems, transmit them to restaurants, and deliver the orders to customers. Platforms claim they provide value to restaurants by expanding their markets, but critics claim they destroy restaurant profitability by taking a percentage of revenues from delivery orders and encouraging customers to order delivery rather than dine-in. We investigate this business model, and answer the following question: can delivery platforms benefit restaurants? Using a stylized model of a restaurant as a congested service system with customers that are both price- and delay- sensitive, we find that the most common contract between restaurants and platforms—a “one-way” revenue sharing contract in which the platform keeps a fixed percentage of revenue from delivery orders—cannot achieve the profit of a centralized system, and often performs worse for the restaurant than having no delivery service. A “two-way” revenue sharing contract, in which the restaurant also shares dine-in revenue with the platform, can coordinate the system; however, this type of contract is infeasible in practice. Interestingly, a “no-contract” relationship—in which the delivery platform simply buys from the restaurant at menu price and resells to customers with a mark-up—often works better than one-way revenue sharing, even though it does not replicate the two-way revenue sharing benchmark. We conclude that the most common contract, one-way revenue sharing, has inherent drawbacks, but these can be partially mitigated by an even simpler relationship with no formal contractual agreement between the delivery platform and the restaurant.

Keywords: on-demand services, delivery platforms, strategic queueing, supply chain coordination

Suggested Citation

Feldman, Pnina and Frazelle, Andrew E and Swinney, Robert, Can Delivery Platforms Benefit Restaurants? (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=3258739 or http://dx.doi.org/10.2139/ssrn.3258739

Pnina Feldman (Contact Author)

Questrom School of Business, Boston University ( email )

Boston, MA
United States

HOME PAGE: http://https://www.bu.edu/questrom/faculty-research/faculty-directory/pnina-feldman/

Andrew E Frazelle

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Robert Swinney

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

HOME PAGE: http://people.duke.edu/~rps23/

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